Many employers in the Tuscaloosa County area, and across Alabama for that matter, provide employees the opportunity to participate in a long term disability benefit. Thousands of employees rely on that benefit to survive in case a disabling injury or illness prevents further employment. This includes virtually every occupation, including retail employees, educators, and professionals, and every type of employer such as manufacturing plants, medical providers or business offices. We all know that anyone can suddenly become disabled in an accident, and of course, no one is immune from serious illnesses. So it is a very important benefit. Even more so as Social Security falters with a lack of funding.
However, the vast majority of employees and employers pay little attention to the actual terms of long term disability benefits being provided. As a result, many employees blindly rely on the benefit, and fail to have a plan. Most forgo purchasing a private disability policy which may well provide better coverage. Many employers also fail to look for a better or more adequate long-term disability plan and assume they are all similar. Or perhaps they simply select the least costly policy. These failures can be a huge mistake that is not detected until the employee is in actual need of the benefit coverage.
Benefits like this which are offered through the workplace, are typically governed by the Employee Retirement Income Security Act of 1974 (ERISA), a federal law. However there are exceptions for certain employers. Nonetheless whether this benefit is governed by ERISA or by state law, the same traps can leave an employee without the needed coverage at a most critical time. There are a number of traps to watch for. I will cover three here.
The first trap:
Usually the long term disability policy has an offset for other benefits received. This may include a disability retirement benefit, worker’s compensation, or a government benefit. The most common offset is the Social Security disability benefit. There may also be an offset for benefits received by children of the disabled person. An offset is an amount that reduces the disability benefit. This is where the trap occurs. Many assume they will receive the full long term disability payment, only to find it reduced to very little. Most never anticipate having their child’s benefit taken into account.
For example, if someone is due to receive a benefit of $2,000.00 per month, but is also entitled to receive a Social Security disability benefit of $1,200.00 per month, then the long-term disability benefit will be reduced to $800.00 per month. Worse yet, if there is an offset for children and the children receive $600.00 per month, then the benefit may be further reduced to a mere $200.00 per month. That is not the benefit anticipated! This dramatic difference catches many people off guard. It is also unfair given that the government requires Social Security claimants to recognize that payments made to children must be spent on the children. This offset relating to a child’s benefits is very unfair given that often the insurer does not know initially who has children and who does not. There may be no underwriting on this. The net result is forced reliance on the faltering Social Security benefit. There are other offsets as well which will be discussed another time.
The second trap:
The disability percentage is another trap that catches many individuals unawares. Many assume that a long-term disability benefit pays your full wage if you happen to become disabled. However, most employers provide disability policies which provide benefits of 50%, 60% or 70% of the monthly wage. So for someone accustomed to earning $4,000 per month, a 50% benefit will pay $2,000.00 per month before any offsets are applied. Right away that person will experience a striking change in standard of living. You don’t get ahead on a disability benefit!
When this trap is coupled with Social Security offsets, in some instances, the combination of the disability percentage and the offset reduces the person’s disability benefit to $0 or very little. The disabled person is then forced to live mainly off of Social Security which does not attempt to match the lost wages. Some policies may have a minimum monthly benefit that is paid regardless of the amount of the offsets but that is typically $50.00, $100.00, or 10% of the benefit before offsets. So some long term disability benefits may not be worth the premiums paid.
The third trap:
The benefit payment will not be prompt. Most disability policies have what is called an elimination period ranging from thirty days to a year. A large percentage of disabilities policies in our area have an elimination period of about 180 days or ½ of a year. This means that the policy will not pay a benefit during the elimination period and one must prove disability that entire time and thereafter. So for someone to survive financially during the elimination period, it is important to have another source of financial support. That is why it is critical to set aside six months of wages as recommended by many financial experts. I know that is hard, but it is harder to live on nothing.
To make this trap more challenging, many long-term disability claims are denied initially after this 180 day period is met, requiring the disabled person to go through an appeal in the claim process. This could add another 180 days or more until payment is made. Also, do not count on Social Security disability benefits coming through right away, as a very high percentage of initial Social Security claims are denied. Those claims require an appeal to an administrative law judge. Additionally, Social Security disability does not pay any benefit for the first five months that an individual is disabled. As a result it could well be a year or two before Social Security disability benefits come through for many.
So what can both employers and employees do to better protect against a sudden loss of income? Here are a few tips:
- Employers should attempt to provide policies with a higher benefit percentage, a shorter elimination period, and no offset for the disabled’s children. It is difficult to find a policy that does not have a Social Security disability offset, but it is very possible to have an offset that does not take into account Social Security payments made to children. The cost difference should be very little, especially compared to the additional coverage provided.
- Employees should consider purchasing private disability insurance. This can be expensive, but it is much better to live on a little less now than to become financially destitute through an accident or through a sudden catastrophic illness.
- Employees should have a plan to survive the elimination period or the Social Security process. Set aside a sufficient amount of money to live on for six months to a year. Again, this requires one to live off a little less than what you are currently earning, however, the above traps can be very painful. I have represented employees in nearly every occupation and each never thought that disability would happen to them. But it happens with frequency such that it should be part of your future plan. Your ability to work is an asset you must protect.