Disability Insurance: Making Sure the Income Stream Doesn't Run Dry

If You Can't Work, Where Will the Money Come From?

Depending on the type of illness or injury you have that prevents you from doing your job, a portion of your income may be replaced by workers' compensation, Social Security disability benefits, an employer's disability program, or other programs.

Workers' Compensation

If you get hurt on the job, the workers' compensation laws in your state will govern how much you receive. The maximum you can receive is 66.6% of your pre-disability gross wages or 80% of your take-home pay, up to a specified limit.

Veterans Disability Benefits

If you have a disability resulting from an injury or illness you sustained while on active military duty, you may be eligible for Veterans benefits. You may also receive additional money for your dependants, depending on the Veterans Administration's (VA) evaluation of your service-connected disability.

You may even be eligible for a disability that is not service-related if you qualify based on your income and the size of your estate. For more information on Veterans Disability Benefits, call your local Veterans Administration.

State Mandatory Disability Plans

California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico all have state-mandated, short-term disability plans. Employees who have a non-work related illness or injury can receive weekly income benefits, generally for up to 26 weeks. There is a maximum benefit, based on your pre-disability earnings, which varies from state to state. Employers may exceed this maximum if they have their own plans.

Company Plans

Most companies today are offering short- and long-term disability plans to employees.

Short-Term Disability

Companies that have short-term disability plans consider you disabled if an illness or injury prevents you from engaging in the regular duties of your job, and pay benefits for a fixed amount of time. Your length of service with the company may determine whether all or a portion of your salary is replaced.

Long-Term Disability

Company long-term disability (LTD) benefits begin if you are still disabled after your short-term disability period, and you meet the definition of long-term disability under the plan.

We have identified some key areas to make it easier for you to understand how these plans work, and what to look for when reviewing your policy. This should make it easy for you to evaluate the strengths and weaknesses of your own company's plan and take action if you would like to enhance your coverage.

How does the plan determine if you are disabled? It depends on how the plan defines disability. Some plans have more restrictive definitions than others. Many plans use a split definition for total disability.

For example, a split definition might be: You must be totally disabled as a result of an illness, accidental injury, or pregnancy. You are totally disabled if you are under a doctor's care and meet these conditions:

  • You are unable to perform the regular duties of your job or a similar one for the first 24 months.
  • After that, you will only be considered disabled if you can't perform the duties of any job for which you are or may reasonably become qualified by education, training, or experience.
  • You are not working at any other occupation.

Make sure to check your plan's definition of disability.

How much will the plan pay? Long-term disability benefits generally replace between 40–60% of your pay.

Can you buy more disability insurance from your company if you need it? Some plans will allow you to purchase additional long-term disability if you wish. Some of these plans will allow you to bring your disability coverage up to 70% of your annual compensation.

When do the benefits begin and how long will they last? Most company LTD plans begin after 26 weeks and pay you a benefit until age 65, as long as you continue to meet the definition of disability.

Benefit periods may also be limited, depending upon when disability begins. The following is an example of an LTD benefit schedule:

If Your Disability Begins
at This Age:

Your LTD Benefits Will Continue
for This Length of Time*:

Before age 62

Until age 65

62

42 months

63

36 months

64

30 months

65

24 months

66

21 months

67

18 months

68

15 months

69 and older

12 months

*The length of time listed here is provided only as an example to demonstrate how benefit period may vary depending on when the disability begins. The numbers of months do not represent the minimum requirement of LTD benefit period by regulations.

How does the plan determine pre-disability earnings? Does the company include salary, plus overtime and bonuses? What time period prior to disability do they use in their calculation?

Who pays the insurance premiums? Your employer may pay the premiums for your short-term disability and will probably pay the premiums for a base amount of your LTD.

Are your benefits taxable when you receive LTD payments? The portion of the benefits you receive from premiums paid by your employer is fully taxable to you. The portion of the benefits you receive from premiums you paid with pre-tax dollars is also fully taxable to you. Benefits you receive from premiums you paid with after-tax dollars are not taxable.

What if you receive other disability benefits? Most company plans reduce the company LTD benefits you receive by the amounts you might receive from other third-party insurers, including Social Security and workers' compensation. Your benefits are typically not reduced by benefits you would receive from an individual disability policy.

Are there certain restrictions or limited benefits if your disability is caused by a mental or nervous disorder? Every plan has certain restrictions for disabilities that stem from emotional disorders or substance abuse.

What rehabilitation services are offered to you through your employer's plan? Many insurance companies that issue long-term disability coverage through employers are taking more rigorous steps to get employees back to work. It is important to know what assistance you can get while you are disabled.

Social Security Disability Benefits

While you may qualify for LTD benefits under your employer's plan, you may not be eligible to receive disability benefits from Social Security. Social Security has the most restrictive definition of disability. A note from your physician alone won't qualify you.

To qualify for Social Security disability benefits, you must have a severe physical or mental impairment that is expected to keep you from doing any substantial work for at least 12 months, or to result in your death. The jobs they say you can perform don't even have to be available in your immediate area, as long as they are available in the national economy.

Here are just a few other important points about Social Security disability benefits:

  • Benefits do not begin until the sixth full month of disability; they then continue for as long as you are unable to do substantial work. Your claim is reviewed periodically.
  • The maximum family benefit you can receive depends on your age and history of earnings. Widows and widowers with disabilities can qualify for benefits based on their spouse's Social Security record; disabled children 18 years and older might be eligible for benefits based on their parent's Social Security record.
  • If you receive workers' compensation disability benefits, your Social Security may be reduced. The total disability payments you and your family receive cannot exceed 80% of your pre-disability earnings.
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