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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
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.
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
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
•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
•Claims starting when age 61…….....4
•Claims starting at age 62…………..….3
•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 HCV.
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 HCV 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 HCV if you stop work due to an HCV-related disability
in the first twelve months of coverage. If, however, you go
out on an HCV-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
• 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
• Self-inflicted injuries
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
• 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
[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 email@example.com or through his website at: www.helpwithbenefits.com ]
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