The Social Security disability system replaces only a small fraction of the typical disabled worker’s earnings. Disability insurance obtained through an employer, a professional association or an individual policy can provide a more substantial financial cushion—but this insurance is loaded with caveats and limitations that most people don’t consider until it’s too late. In fact, employer-sponsored group disability coverage should never be counted on for long-term financial security—these policies contain provisions that often allow insurers to terminate legitimate claims long before the claimant reaches age 65. (For an article on Social Security disability benefits, see the August 15, 2013 issue of Bottom Line/Personal or go to BottomLinePublications.com/Disability.)
Here are important but poorly understood details about disability insurance…
If you obtain your disability insurance through an employer or a professional association…
Your coverage is based on your ability to work in your current occupation, not your current job. You won’t receive benefits if there are jobs in your current profession that you would still be capable of doing.
Example: A retail manager’s current job requires him to lift 50-pound boxes. He likely will not receive benefits if a back injury prevents him from lifting those boxes—the insurance company will argue that the Department of Labor’s official description of the retail manager occupation does not list heavy lifting as a requirement.
Your policy won’t replace as much of your predisability income as you might expect. Policy provisions typically claim to replace 60% of base salary, but even that overestimates their benefits. These policies usually contain “offset provisions” that allow the insurance company to subtract from the 60% any money that you receive from Social Security disability, workers’ compensation, state disability programs, retirement and pension plans and perhaps even injury settlements related to your disability.
Warning: Don’t try to escape the Social Security disability offset by not applying for Social Security disability benefits. While policies typically do not contain provisions requiring claimants to apply for Social Security disability, they usually do contain language that allows the insurer to reduce your benefits based on its estimate of the benefits that you would have received.
Coverage for mental and nervous conditions usually is capped at just 24 months of benefits. This is true even if your mental-health providers have not released you to return to work after 24 months.
You can’t sue for punitive damages even if the insurance company acts in bad faith—and you might have trouble suing at all. Employer-sponsored disability policies are covered by the Employment Retirement Income Security Act of 1974 (Erisa). Erisa lawsuits are extremely time-consuming for attorneys and offer no possibility of obtaining punitive damages from the insurer. The most you can win is the benefits that you should have received in the first place. With such a limited upside, it can be difficult to find an attorney willing to take the case—and without an attorney, Erisa claimants have very little chance of success.
Exception: Many attorneys will consider claims if the policy offers relatively hefty benefits of $3,000 or more per month, and there are some attorneys who will litigate less lucrative Erisa claims as well. Expect your attorney to claim 30% of unpaid back benefits plus 40% of all future benefits.
Benefits will be paid beyond 24 months only if your disability prevents you from working in any occupation. For the first 24 months, policies typically pay benefits if you can’t work in your current occupation. But after that time, benefits usually continue only if the disability is severe enough to preclude employment in any occupation for which you have training, education or experience. Many approved claims no longer pay out after this initial 24-month “own-occupation” period.
What’s more, access to group health coverage often is linked to disability coverage—if your benefits end after 24 months, your right to remain on the company health plan might end then, too. Employees can use Cobra health insurance coverage to remain on their company plans for up to 18 months beyond that, but that requires paying for the coverage out-of-pocket, something many families cannot afford.
Your employer likely selected a disability insurance provider based on price—but if it selects a provider that tends to treat claimants unfairly, it’s you who will pay the price. Some insurance companies truly attempt to be fair with claimants, while others seem to regularly reject legitimate claims, knowing how difficult it is for claimants to appeal.
If you purchase disability insurance on your own…
Self-employed professionals should expect to be asked for massive amounts of financial data when submitting a claim for benefits. The insurer might demand five to six years of past tax returns and 12 months of monthly profit-and-loss statements for your business to determine how much you should be paid. If your business doesn’t create monthly profit-and-loss statements, you may be asked to compile them retroactively. (If you aren’t self-employed, you will be asked to submit two years’ worth of tax returns.)
Most individual policies offer reduced benefits or no benefits at all if you still are capable of working in any profession—even a profession very different from your current one. It’s worth paying extra for what’s called own-occupation disability coverage. Read the contract carefully to make sure that you are buying true own-occupation coverage and not modified own-occupation coverage, which might reduce or eliminate your benefits if you do later work in another profession. Also read how the policy defines your “own occupation.” Some use intentionally broad definitions of this to avoid paying claims later.
Waiting to make a claim increases the odds that your claim will be rejected. The insurer might argue that the delay “prejudiced the investigation,” making it impossible to determine if and when you really were disabled. Make a claim as soon as your doctor recommends that you stop working. You do not need to wait until the end of the policy’s elimination period—the number of days that you have to wait for your first check—to file your application.