Disability insurance: a primer on coverage

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The economic toll of disabling injury can range from budget tightening to compensate for lost wages to filing for bankruptcy. A counterweight to financial hardship is disability insurance.

The Insurance Information Institute in New York estimated in 2009 that 43 percent of 40-year-olds will have an incident causing long-term disability — defined as lasting 90 days or more — by the time they turn 65. Disability insurance offers a safety net, but victims can easily slip through if they don’t know how the system works.

Disability-income insurance comes in three basic categories: employer-provided insurance, private individual policies and government-sponsored programs, such as Social Security disability. Still, at the state level, only California, Hawaii, New Jersey, New York Rhode Island and Puerto Rico offer their own disability insurance programs.

Disability insurance primer
  • Employer-sponsored disability insurance
  • Individual private disability insurance
  • Social Security disability insurance
  • Easing back into the work force

Employer-sponsored disability insurance

First, find out what kind of disability insurance your employer offers. Most states require at least some disability coverage in the form of sick leave, and about half of all large and midsized employers also provide long-term coverage, the insurance institute says.

As of 2003, there were about 235,000 employers who provided group disability insurance to 35.5 million people, institute economist Steve Weisbart says.

Group policies for long-term coverage will usually replace at least half of your salary, up to a set maximum amount, according to the Federal Citizen Information Center, or FCIC, a division of the U.S. General Services Administration. Typically, these benefits will last until you reach 65 or your retirement age under Social Security, or until you are able to go back to work. Some policies extend benefits for a short time after you start working again.

One of the limitations of employer-sponsored disability insurance arises when workers try to appeal a claim denial, says Eric Buchanan of the law firm Eric Buchanan & Associates PLLC in Chattanooga, Tenn. Employee benefits, including disability insurance, fall under the Employee and Retiree Income and Security Act of 1974, or ERISA.

“Under ERISA, you cannot sue if you’re denied your disability benefits for anything more than the amount of the benefits, plus maybe attorney’s fees,” Buchanan says.

With no additional penalties when their denial is reversed, employee disability insurance providers have little financial incentive to approve your claim, Buchanan says.

Individual private disability insurance

If your job doesn’t provide long-term disability coverage — or it does, but it’s not enough — consider shopping around for an affordable policy of your own. According to the insurance institute, private disability income policies typically pay 50 percent to 70 percent of your income.

The average annual premium per policy for noncancelable disability insurance — both short-term and long-term — was $1,995 in the third quarter of 2009, according to the member sales report of LIMRA International, Inc., a Windsor, Conn.-based research and consulting organization for the insurance industry. The average premium for a guaranteed renewable policy was $635.

Premiums under a noncancelable policy cannot go up while guaranteed renewable policy providers may change premiums, but only for entire blocks of policies, not individual policyholders.

Even so, the amount you pay for disability insurance can depend on your age, health, history of smoking and gender.

Women generally pay more for individual policies because their average claim costs are higher, according to the FCIC. Premiums also rise as the income you need to replace rises and when you have a riskier occupation, says J. Robert Hunter, director of insurance for the Consumer Federation of America in Washington, D.C.

Policies that pay when you are unable to work in your own occupation cost more than those that only kick in if you can’t work in any occupation. Buchanan says the upgrade is worth it, although it’s harder to get than it used to be.

Buchanan also recommends buying a policy that includes a provision for cost-of-living adjustments in benefits, either as a standard feature or in a rider.

“If you stay disabled for an extended period of time, inflation will eat up your benefits,” Buchanan says.

You can save on premiums by electing a longer waiting period and a shorter benefit period. The waiting period is the amount of time you must be disabled before receiving benefits. Sixty to 90 days is ideal, but you’ll need to take your other income sources into consideration and be aware that your first check won’t come until 30 days after the waiting period ends.

Your benefit period determines how long you are eligible to receive monthly payments over your lifetime. While a shorter benefit period means lower premiums, make sure your policy will pay benefits at least until your retirement age.

If both you and your spouse are working, one policy may be enough. “If you’re in a family where you have two breadwinners, but one makes 75 percent or 80 percent of the combined income, maybe you don’t need to insure both,” Hunter says.

Social Security disability insurance

Even if you have private long-term disability insurance coverage, you are likely to file a claim for Social Security benefits if you’re laid up for a lengthy period of time.

“People who are on long-term benefits — and this is a general rule because it really depends on the policy — are required to apply for Social Security disability insuranceafter they’ve received private long-term disability for about two years,” says Ray Cebula, a faculty member at the Employment and Disability Institute at Cornell University in Ithaca, N.Y.

The Social Security Administration pays two types of benefits to disabled workers: Social Security Disability Insurance and Supplemental Security Income. SSI applies to workers who don’t have enough earnings credits to be eligible for Social Security retirement benefits.

To qualify for Social Security disability benefits, your condition must be expected to either last at least one year or be terminal. Even though you cannot begin receiving Social Security benefits until you have been off work for at least 12 consecutive months, you should still apply as soon as you become disabled, especially if you have no other disability insurance.

The Social Security Administration estimates that the application process takes three to five months. The SSA reviews your application — complete with your medical records and work history — and forwards it to your state’s Disability Determination Services office if your work history meets the basic requirements for eligibility. While the state agency makes the decision on your claim, it follows a uniform set of SSA rules.

Your doctors will be asked to provide information about your medical condition, but you also may submit any medical records you have in your possession.

“That evidence may be enough for us to make a decision in that case,” SSA spokeswoman Dorothy Clark says. “And that cuts down on the processing time of that application.”

If your application is approved, you’ll receive a letter that tells you the amount of your benefit and the date your payments will begin. If your application is denied, the letter will give an explanation as well as information on how you can appeal.

In 2008, the average monthly benefit awarded to disabled workers under SSDI was $1,063.10, according to the SSA’s annual report on the Social Security Disability Insurance Program. Social Security benefits are paid through the sixth full month after the date your disability began, and the first check arrives the month after your eligibility period starts.

Your monthly disability benefit depends on your average lifetime earnings. The amount also may be affected by your receipt of other government benefits. If you are getting workers’ compensation, civil service, military, state temporary disability or state and local retirement benefits based on disability, the total amount combined with your Social Security disability benefits may not exceed 80 percent of your average earnings at the time of your disability. Should your total government benefit go over that amount, your Social Security benefit will be reduced. Disability payments from private sources do not affect your SSDI benefits.

Easing back into the work force

Once you’re in the SSA disability system, you may be able to take advantage of federal work incentives and employment support programs that let you begin working again without immediately losing your benefits.

“The rumors on the street, saying that if you go back to work you’re going to lose your benefits and your health care, are just simply not true,” Cebula says.

The SSDI’s trial work period lets you accumulate up to nine months of work — not necessarily consecutive — and receive full benefits no matter how much you earn. Any month in which you earn more than $720 or you work more than 80 self-employed hours counts toward the nine-month limit.

After the trial period ends, you forfeit benefits for the months in which your earnings are above the designated “substantial gainful activity” level, or $1,000 a month in 2010. Blind beneficiaries can earn up to $1,640. For an additional 36 months after the trial work-period ends, you can restart your benefits if your earnings drop below the gainful-activity level and you continue to be disabled.

If you are a working SSI recipient, your earnings may affect the size of your benefit check, but the first $65 of your monthly earnings, plus one-half of the remainder, is subtracted before the benefit amount is calculated.

Another federal program called Ticket to Work is available for those ages 18 to 64 who receive either SSDI or SSI benefits. It offers free access to vocational rehabilitation, training, job referrals and other types of services for work force re-entry. Your Medicare or Medicaid benefits continue while you participate in the program. To get started, you can contact a member of the SSA’s Employment Network or the nearest state vocational rehabilitation agency.