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Long-Term Disability Insurance Policies: Paying Top Dollar for Lower Premiums

The most commonly known resources to insure against disability are long-term disability insurance (LTD), and Social Security disability insurance (SSDI). You pay for LTD – either through your employer or out of pocket – so that a private entity will provide income if you are unable to work long term. SSDI is a government insurance policy automatically deducted from your paycheck each week for the very same reason. The rules to establish disability under each policy are different, and if you are already collecting benefits under your LTD policy you will need to become familiar with SSDI.

Almost all LTD policies will require you to apply for SSDI once you have begun collecting LTD benefits. The reason is simple: the insurance company that holds the LTD policy wants to be subsidized by the Federal Government. Specifically, if you receive SSDI benefits during the same time period you are recieving LTD benefits, you will likely have to pay back the insurance company for the benefits you received from SSDI. For example, if the LTD policy awards someone $1,000 benefits per month, and SSDI benefits amounting to $800 per month are also awarded to that same individual, the company providing LTD benefits may only have to pay out $200 dollars per month.

While insurance companies justify this practice of exploiting workers by claiming that insurance premiums would be higher without it, the story doesn’t stop with these monthly offsets. From the time you first apply for SSDI benefits, payments begin to accrue as if you were already considered disabled by the SSA. With wait times for SSDI approval stretching into months or years, a person out of work and with a disability can go a long time without seeing a check, but the SSA keeps tabs on how much is owed so that retroactive benefits can be awarded when they finally determine whether or not you are disabled.

Retroactive benefits take the form of a lump sum paid to you for every benefit check you would have received starting from the time you submitted your application. This could help pay for medical bills or debts, if you were allowed to keep it. But often, your LTD insurance company takes most, if not all, of your retroactive benefits as compensation for the “overpayments” it made to you while awaiting approval.

Returning to the $1,000 example given above, say you applied for SSDI and waited 24 months for approval. You would have been paid $1,000 per month by your LTD insurance company, and also have accrued $800 per month in SSD retroactive benefits from the date of application. The SSA would then pay you a lump sum of $19,200 after approval.

However, the LTD insurance company—whose premiums you were paying throughout your working life alongside the automatic deduction taken from your paycheck for SSDI, just-in-case something happened—will then claim it overpaid your policy, and takes the $19,200 to make up for that “overpayment.” This means that for a $1,000 per month policy, the company paid you only $4,800 in benefits over a two year period.

Offsetting LTD payments with SSD benefits sounds sensible from the perspective of keeping premiums low, but is in fact unreasonable when you consider that other insurance policies you pay into don’t have unfair offsets. Also, supposed savings on ‘lower premiums’ are lost when you have to forfeit your hard earned money, accrued over a lifetime, because of a policy bought just-in-case.

Every LTD policy is different and we recommend reading your LTD policy carefully to learn about the interplay between SSDI and LTD benefits. If you have any questions, please do not hesitate to contact our office. We are here to help.

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