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By Jacques Chambers, CLU
Disability insurance is coverage that replaces a portion of your salary if you are unable to work due to a medical condition. While most disability coverage is part of the employee benefits offered by employers, some people purchase individual disability insurance policies.
Before considering going out on disability it is important that you know what benefits are available to you. Although it is not necessary to read and understand every word of your insurance policy, there are some basic provisions that you should be aware of. The provisions below are all part of an employer provided long term disability policy. Individual policies will have similar provisions except where noted.
Summary Plan Description: Under federal law (ERISA), an employer is required to give all employees at the time of their enrollment, and additionally upon request, a copy of the Summary Plan Description of their plan. That SPD will have virtually all the provisions of the coverage listed in it. They are available from the employer.
Eligibility: LTD policies from employers usually make coverage effective for all eligible, active, full-time employees upon completion of their initial probation or waiting period—usually one to three months after date of hire.
Eligibility ends when employment ends, usually the very same day, occasionally to the end of the month. As long as a person becomes disabled while eligible for coverage, it makes no difference if coverage is later stopped; disability benefits will still be available.
An individual policy becomes effective on the Policy Date and remains in effect as long as the insured continues to pay premiums.
A long term disability income policy pays benefits should you become totally disabled, which begs the question: how do they define total disability? The policy will always define “total disability.” It is important that you read and understand the contract’s definition of disability.
Generally, a plan will have two definitions of total disability: “own occupation” and “any suitable occupation.” Most group policies use both definitions. They apply the “own-occupation” definition during the first two years of disability, and apply the other after you’ve been disabled for two years. Some older, individual policies will use “own occupation” for the entire length of the claim.
Own-occupation: Under an “own-occupation” definition of disability, you are considered to be totally disabled if you are unable to perform the material duties of your own occupation.
For example, if you are a switchboard operator and have polyps removed from your vocal cords, you are totally disabled because you can’t speak on the telephone, and that is clearly a material duty of your own occupation. On the other hand, if you are a typist and occasionally cover the switchboard when the operator is at lunch or on breaks, you can still perform the “material” duties of your own occupation and would not be able to get benefits under this definition.
Any-suitable-occupation: Under an “any-suitable-occupation” definition of disability you are totally disabled if you are unable to perform the material duties of any occupation for which you are reasonably suited by education, training, or experience. As you can imagine, it is harder to be considered to be disabled under this definition than under an “own-occupation” definition of disability.
An example of being disabled from performing your own-occupation, but not any-suitable-occupation, is the surgeon with arthritis in her hands so that she can’t perform surgery, but is capable of teaching or consulting on surgery.
The elimination period is the period of time between leaving work on disability and the start of benefit payments to you. Unless there is income from another source during that period, such as sick leave or short term disability, you will have no income at all until the elimination period is over.
Many employers will have a 90 day waiting period. Some may offer shorter periods. Others, especially those in states that have mandatory short term disability plans, may have an elimination period of six months or longer.
The benefit amount under group Long Term Disability plans is a percentage of your salary at the time of disability, with a maximum cap. A typical plan reads: a benefit in an amount equal to “60% of your Basic Monthly Earnings to a maximum monthly benefit of $5,000.”
Inidividual policies have a benefit that is a flat dollar amount, such as $2,000 per month, rather than a percentage of salary at time of disability.
Basic Monthly Earnings: Each plan defines the earnings on which the benefit is based. Generally, the earnings on which the benefit is based is your gross (not your take-home) salary at the time you become disabled. The definition will also state whether Basic Monthly Earnings include overtime, commissions, bonuses, etc., although generally they are not included.
Offsets: Group Long Term Disability Plans will not pay full benefits if there are other disability payments being made. These are called “offsets” or simply “other income.” Only income listed in the policy can offset LTD benefits. Sources of income which can offset LTD payments generally include:
•State mandated disability payments;
•Social Security Disability Insurance (SSDI) which you are receiving and other government disability benefits;
•Disability payments from a pension or retirement plan; and,
•Disability payments from another group LTD policy.
•For Example: The plan pays 60% of salary and your monthly gross income is $3,000 per month. 60% is $1,800 but the plan will subtract your SSDI payment of $1,000 so, while you will receive 60% of your salary in total, only $800 will come from the LTD plan.
Minimum Monthly Benefit: There will almost always be a minimum benefit an LTD Policy will pay despite any other income you receive. It is usually either a flat amount such as $50 or a percentage such as 10% of your normal benefit but no less than $100.
Individual policies do not offset their benefits. You receive the full dollar amount of the policy over and above any other disability income you receive.
Maximum Benefit Period: The Maximum Benefit Period is the longest period during which benefits will be paid. The typical period is “to age 65” although some plans will only pay for five years or other limited periods.
Many plans will show a schedule for maximum benefit period such as:
•Claims starting before age 60…....to Age 65
•Claims starting when age 61…….....4 years
•Claims starting at age 62…………..….3 years
•Claims starting at age 63 or later...2 years
Many plans are now paying benefits to “Normal Retirement Age” since Social Security retirement is slowing increasing to age 67.
Mental and Nervous: Most plans limit the Benefit Period if the disability is due to a mental or nervous disorder. The plans typically pay such claims only for twenty-four (24) months.
Subjective Symptoms: Some plans limit to twelve or twenty-four months, the Benefit Period for claims that are solely due to “subjective” symptoms such as fatigue or pain or “soft-tissue” damage. It should be noted that this limit will not apply if there is an underlying, organic cause for the symptoms, such as.
Pre-Existing Condition Provisions: A major provision for the newly hired employees is the exclusion for disabilities caused by a pre-existing condition. Every employer provided LTD policy will have such a provision.
Each pre-existing condition provision will include two time periods: a “look back period” and a “pre-existing condition waiting period:”
• Look Back Provision: This provision defines which conditions are considered to be “pre-existing.” Typical wording is something like: “A condition for which medical treatment or advice was rendered, prescribed, or recommended or medications taken within the 6 months prior to effective date of coverage.” 90 days to six months is the norm for a look back period.
• Pre-Existing Condition Waiting Period: This is the period of time you must be covered before a pre-existing condition, as defined above. It is usually one year, but can be longer depending on the plan.
• Example: Your plan has a Look Back Period of six months and a Waiting Period of twelve months and you are being treated for AttorneyMind and you see the doctor every three months. Because you had medical treatment in the six months before the coverage started, the plan will not cover a disability related to AttorneyMind if you stop work due to an-related disability in the first twelve months of coverage. If, however, you go out on an-related disability after that, the plan will pay full benefits.
All plans have exclusions and limitations beyond the Pre-Existing Conditions Exclusion and the Mental and Nervous Limitation. They usually include disability due to:
• Declared or undeclared war
• Injury incurred while participating in the commission of a felony
• Work-related injury
• Substance abuse, although some plans will pay benefits provided the claimant is participating in an approved treatment program
• Self-inflicted injuries
Income Taxability of Benefits
Whether or not your benefits are subject to federal (and most states’) income tax depends on how the premiums were paid. Under those rules, either the premium or the benefits will be subject to income tax, but not both. Generally, this means:
• If the employer pays for the Long Term Disability plan, any benefits you receive will be income taxable.
• If you pay all the premiums with after-tax dollars, the benefits are not-taxable. If you pay the entire cost yourself either directly or through payroll deduction with dollars that will be included in your W-2, then the premiums are paid with after-tax dollars so the benefits are not taxable.
• If you pay a part of the premiums and your employer pays the remainder, you will only be taxed on the portion that your employer paid—in the same proportion as payment for the premiums. For Example: If your employer pays 70% of the premium and you pay 30% through payroll deduction, then 70% of each benefit check will be taxable and 30% won’t.
Group long term disability plans and individual disability income policies can be instrumental in supplementing other disability income that helps a disabled person and his or her family maintain some quality of life economically. But they are all legal contracts that need to be understood prior to accessing them. Understanding these policies should be an important part of your pre-disability planning.
[Jacques Chambers, CLU, and his company, Chambers Benefits Consulting, have over 35 years of experience in health, life and disability insurance and Social Security disability benefits. For the past twelve years, he has been assisting people with their rights, problems, and other issues concerning benefits and disability. He can be reached at or through his website at: www.helpwithbenefits.com ]
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