Long term disability insurance provides income to workers whose earnings are interrupted by a lengthy period of disability. However, it is important to recognize that under the terms of most employer-sponsored LTD plans and many group disability policies, Other Income Benefits (also referred to in many policies as Deductible Income) are factored into the monthly benefit calculation; and if rewarded, usually result in a reduction to the monthly disability benefit paid by the LTD insurance carrier. Other Income Benefits include Social Security Disability benefits, state provided disability benefits, worker's compensation benefits, disability benefits paid under certain pension and retirement plans, compensation from an injury settlement and/or benefits paid under another long-term disability policy.
The focus of this article is the impact of Social Security Disability benefits on an insured's Long Term Disability benefit amount. Significantly, it should be noted that in most cases benefits received from profit sharing plans, 401k plans, employee stock options, tax sheltered annuity plans, severance pay, and individual retirement accounts will NOT reduce an insured's monthly disability benefit.
Under the terms of most Long Term Disability policies, the disability insurer is provided a dollar-for-dollar deduction of social security disability benefits received by their insured. Equally important is that the LTD plan usually allows the insurer the right to reimbursement for any "overpayment" when the insured is given a retroactive lump sum benefit payment. In fact, it is not unusual for an insurance carrier to send a "Social Security Reimbursement Agreement" along with the application for disability benefit forms.
What is the impact of these offsets on long-term disability benefit calculations? When an employee becomes totally disabled, under the terms of his or her LTD plan the employee is guaranteed a specific percentage of monthly earnings (usually 60%, but it can be higher or lower depending on the plan's terms). For example, if the plan provides a target monthly benefit of 60 percent of earnings, and the employee becomes totally disabled while earning $36,000.00 per year ($3,000/month), his monthly LTD benefit will be $1,800.00. If that same employee also qualifies for primary Social Security disability benefits of $800/month, the benefit would be reduced to $1,000.00 (Gross LTD Benefit of $1,800 minus $800 SSDI benefit results in Net LTD Benefit of $1,000.00). Under many plans, the gross LTD benefit can be further reduced by SSDI benefits awarded to the insured's spouse or children as the result of his/her disability. However, annual cost of living increases for SSDI benefits are normally excluded as an offset.
Almost every policy includes language obligating the insured to pursue all Other Income Benefits or Deductible Income for which the inured may be eligible. Additionally, written documentation confirming that such benefits are being pursued is often required. If such benefits are not applied for, then under the provisions of most policies, the insurance carrier has the right to estimate the insured's entitlement to these benefits and then reduce the monthly LTD benefit by the estimated amount. However, in most cases the carrier will not reduce the monthly benefit by an estimated amount if the insured: 1) applies for all deductible income benefits to which he/she may be entitled; 2) appeals any denial to all administrative levels the carrier feels are necessary; and 3) signs the insurance company's Reimbursement Agreement form, which states that the insured promises to pay the carrier any overpayment caused by an award.
What is an overpayment?
If we apply the following facts:
- The insured is entitled to an $1,800/month LTD benefit;
- The Insured received this benefit for 18 months;
- The insured was recently awarded Social Security Disability benefits in the amount of $800/month;
- The SSDI award determined the insured to be eligible for the first SSDI benefit payment 12 months prior to the decision;
- The insured is expected to receive a lump sum payment from social security of approximately $9,600.00 ($800 per month times 12 months).
According to the terms of the LTD policy, there was an overpayment to the insured by the insurance company in the amount of $9,600.00. Thus, even though the insured did not receive any deductible income for the first 18 months he received LTD benefits, the insured is contractually obligated to reimburse the insurer for that money.
When the insurance carrier finds out that the insured has received a retroactive lump sum benefit award, the insurer usually has the option of demanding one lump sum reimbursement check, reducing the monthly benefit by a certain dollar amount until the overpayment has been reimbursed or ceasing all benefit payments until the overpayment has been repaid.
Should you sign the Social Security Reimbursement Agreement? In most cases, the simple answer is "yes". Since the insurance company is typically entitled to an offset based on the amount of SSDI benefits received by the insured, signing this Agreement usually ensures that the insurance company won't offset an estimated benefit amount from the monthly LTD benefit and that no offset will be applied until such benefits have been awarded. Just as importantly, an insured's willingness to sign this Agreement allows the insurer to feel comfortable that the insured understands and acknowledges the offset, has agreed to reimburse the insurer for any retroactive benefits awarded; and understands that should a lump sum benefit be awarded by social security that amount is to be paid to the insurance carrier as reimbursement for an overpayment. In return, the insurance company will agree to pay the gross LTD benefit amount until such time that all applicable offsets have been determined.
Following are a few additional pieces of information to help you better understand the Other Income/Deductible Income provisions. Typically, there is no offset against Short Term Disability benefits because the Social Security Administration does not pay benefits until several months after the date of disability. Second, the insurance company is not normally entitled to offset any Cost of Living Adjustments paid by the Social Security Administration. However, under most policies, they can offset the benefits received by an insured's family as a result of the insured's disability.
Often times, SSDI benefits are not awarded following the initial application for benefits and the insurance carrier will require the insured to appeal that denial. At that point, or possibly at the onset of the claim for LTD benefits, the carrier will recommend an attorney to facilitate the application for SSDI benefits or represent the insured during the appeal process and suggests that they will pay the attorney's fee. In the opinion of the attorneys at DI L aw Group, it is disingenuous for them to provide such representation and we often recommend that our clients obtain local representation. Should you have any questions about your disability policy, what sources of deductible income may result in an offset to your LTD benefit or simply want to discuss the terms of your disability policy to better understand how you will be affected should you become disabled, please contact us for a free consultation at 1 (866) 363-3628.