Articles

Is Your Long-term Disability Policy Worth What You Think It Is?

By Denise Yegge Tataryn, Attorney At Law

Many employers provide short-term and long-term disability benefits to their employees to provide replacement income in the event an injury or sickness prevents an ability to work. While employers may insure their employees for up to 60-70 percent of their earnings, the net long-term disability benefit can be far less than that. Group LTD policies offset certain other disability-related payments from the gross LTD benefit. Disability-related payments that are offset (or subtracted) from the net LTD benefit include Social Security disability benefits, workers' compensation benefits, state disability benefits, and disability retirement benefits. As an example, if your policy provides for a benefit of 60 percent of your earnings, and your earnings are $4,000 per month, you will receive a gross monthly benefit of $2,400. If you have a long-term illness and are receiving Social Security disability benefits in the amount of $1,200 per month, your LTD benefit is reduced by that amount, giving you a net LTD benefit of $1,200, or only 30 percent of your earnings. On top of that, your benefit may be taxable, further reducing the value of your benefit. The benefit is nontaxable only if the employee paid the premium with post-tax dollars.

Consider these other factors that also lessen the value of your LTD policy:

• Maximum benefit provision: Even though your policy may insure you for 60 percent of your income, a maximum benefit provision may limit a benefit at a certain amount (such as $3,000 or $5,000). Higher wage earners may end up with only a small percentage of their earnings.

• Mental illness limitation: Most LTD policies limit LTD benefits for mental illnesses to a 24-month period. This means if you suffer from depression, PTSD, bipolar or other similar inflictions, you will only get benefits for 24 months, rather than until age 65, the typical cutoff for physical illnesses.

• Self-reported symptoms limitation: Some policies limit benefits to 24 months or less if the disability is based primarily upon self-reported symptoms. Illnesses such as chronic fatigue syndrome, migraines, or fibromyalgia may fall within this trap.

• Limitation on certain types of physical conditions: Some common disabilities may not be covered or only for a short duration, such as back injuries, musculoskeletal disorders, and chronic fatigue syndrome.

• Definition of disability: Most policies will define disability as an inability to do your regular occupation for an initial period of time, but will then change to require you to show an inability to perform any occupation, a much more difficult standard to meet. Also, some policies will only cover total disability, so if you are able to work part-time, benefits will not be payable.

• Discretionary authority provision: This provision will give the insurer the edge if you are forced to go to court for your benefits. It means the insurer or claims administrator has been given the discretion to decide your benefits, and the court will not overturn a denial of benefits if there is some evidence supporting the decision.

Fortunately, there are some ways you can protect your benefit. As an employer, negotiate the best product for your employees within your price range by minimizing limitations and carefully reviewing policy language. Give your employees the choice to pay the premium so the benefit is nontaxable. As an employee, request and review your policy so you are aware of any limitations. Suggest that your employer renegotiate a better package or change insurers. Purchase a supplemental disability policy if needed to cover any gaps in coverage.