Disability insurers are permitted by law to reduce monthly disability benefits by the amounts awarded by the Social Security Administration as Disability Income. In a manner of speaking disability insurers subsidize their financial accountability using monies paid by the American people with FICA dollars. The trend over the last 10 years is to increasingly add dependent SSDI offsets to employer group STD/LTD policies in an effort to reduce the amount of spendable income a family actually has access to.
While most think SSDI reductions to monthly disability benefits are unfair, there is a reason why group LTD policies are constructed to include offsets. First, disability policy contracts are written with offsets to prevent middle class workers from profiting by periods of disability wherein disability income plus other income could actually provide the employee with more income when disabled than when working. If claimants were able to receive more money by NOT working….why work?
Clearly, the state and federal government prefers an insurance income replacement system that encourages working rather than providing a subsidy to those who earn more money by not working than working. This is why most group STD/LTD polices only replace income at the rate of 60% rather than 100%. Some employers pay employees for a period of 100% salary continuation, but only for relatively short periods of time to allow the processing of LTD and the payment of a lesser benefit.
The theoretical idea of offsets is a good one. Suppose an individual earned $2,000 a month before becoming disabled. His LTD benefit was 60% of that or $1,200. If his Primary SSDI benefit is $1,500 and his dependent son receives half of that, or $750, the claimants total disability income would be $3,450 without offsets. That’s $1,450 more than what the claimant would make if he were to return to work. Why work? Disability income insurance is intended to provide income replacement at the rate of 60% when unable to work. The system is designed to encourage claimants to return to work rather than remaining on disability for long periods of time.
Most people who contact us do not have a problem with Primary SSDI offsets (awards to the claimant), but have trouble accepting offsets for dependent children which are half of the claimant’s award. Most often we hear, “they can’t take the money from my children can they?” And, our answer is always, “yes, they can, if the policy says they can.” Dependent SSDI awards represent disposable or spendable income to the family. In reality, how many SSDI claimants actually either give the dependent check directly to the kids, or start savings accounts and put the money away each month for the child’s future? Even though the dependent SSDI award can be viewed as a type of subsidy “child support”, the money is actually added to the total amount of spendable household income and could actually provide a profit to an individual who can work, but chooses not to.
Problems with the offset system come into play in cases of separated families, or in situations when child support is being paid to a disabled spouse. In the past, Unum did not offset SSDI awards in cases when the disabled spouse does not have custody of the children and who also pays child support. The current trend, however, is for the insurer to offset ALL SSDI awards whether or not the children are living with the claimant or child support is also being paid. Imagine how awful it would be for a claimant’s benefit to be reduced by the SSDI dependent award and ALSO have to pay child support to the custodial parent.
Although I’ve been playing the Devil’s Advocate here a bit, we all appreciate how difficult it is to live on 60% of pre-disability income to begin with. Bottom line, Social Security Disability offsets prevent workers from collecting in excess of 60% of income while disabled. Until such time as the federal government in conjunction with the insurance industry change the current subsidy system, claimants can expect to receive only 60% of pre-disability income regardless of the source. Although some minor changes are being considered, I suspect “offsets” will continue long into the future.
The key to understanding SSDI awards, offsets and repayments is to read your STD/LTD policies as soon as you become enrolled and understand very clearly what the “net” amount of money you will have to live on should you become disabled. Nearly all group STD/LTD policies require the claimant to apply for benefits and follow the process through to the Administrative Law Judge stage. Assuming you will eventually become disabled according to SSA’s definition of disability, any amounts received will reduce your disability monthly benefit, and amounts may have to be repaid to the insurance company. I always tell my clients to plan and put together a Plan B.
Group disability policies are unreliable sources of future income. Given the amount of time and energies given by insurers to NOT pay benefits, offsets from the monthly benefits pale in comparison to not receiving the benefit at all. Even when ERISA cases are litigated, the claimant’s monthly benefit is reduced to 35% when an attorney takes 40% of future benefits, assuming the case is won in federal court. Claimants with employer-sponsored group disability policies need other sources of income when faced with a long-term or permanent disability. There has to be a Plan B.
Most Plan Bs rely on income from a healthy spouse who is still working. However, for single parents, there is no healthy spousal income and the situation quickly becomes disastrous as total income is reduced to 60%, assuming disability benefits are approved. Most individuals have a false sense of security when it comes to group LTD coverage. It is essential for those workers with group LTD plans to read the policy and actually put pen to paper to determine, in advance of a disability, how much money will be available to live on. SSDI offsets and repayments should not come as a surprise to anyone.
Please request a copy of your group STD/LTD plan and read it carefully paying particular attention to the “Other Income” provisions describing offsets. Figure out how much disposable income you will have each month to live on as defined in the policy. It is very unwise for any employee to accept group LTD benefits as total protection for periods of future disability. Then, think about what your Plan B will look like long before you become disabled and take the necessary steps to protect yourself and your family. Group employer sponsored LTD plans are not secure or dependable sources of future disability protection.
