Disability Insurance: Payments and Pitfalls

by Nora Dunn on 6 December 2007 15 comments
Photo: Brandon Page

A massage therapist hurts their hand in a silly accident playing volleyball. For most of us, a broken finger or torn ligament in our hand is a serious inconvenience, but not an insurmountable one. For the massage therapist, it is their career.

Until that therapist’s hand is better, they are considered totally disabled. If they don’t have insurance, their only option is to find another job until their hand is in good enough shape to return to massage therapy, which could take many months or even years. Meanwhile, the therapist can’t devote the time necessary to find a replacement for their clients (because they are working at another possibly lower paying job), and they may lose their client base and career in so doing.

 

There is another way.

 

Disability Insurance (DI) is yet another tool in the arsenal of insurance products that may be a life-saver for some people, but that also can unveil some bitter surprises at the worst times. Let’s look at the facts:

 

Three Definitions of Occupation

All disability insurance policies will operate under one of three different definitions of occupation which determine the level of coverage you receive:

Any Occupation

This is the least expensive (and of course the least comprehensive) form of coverage you can have. It states that the insurance company will pay out disability benefits if you cannot perform “ANY occupation” for which you are reasonably skilled, trained, or capable of being trained for.

So although you are a massage therapist and are paralyzed from the neck down, if the insurance company thinks you could sell pencils over the phone, you are out of luck for getting any benefits. (This is an exaggeration of sorts, but you may be surprised at how close to the mark it is).

 

Regular Occupation

The insurance company will pay benefits if you are unable to perform the duties of your “regular occupation”. So as a massage therapist, you will receive disability benefits if you can’t perform the job of a massage therapist. The catch is, they’ll fight your claim if you can’t attend to your own clientele in the clinic you work in (because of stairs, or a specialized kind of massage therapy), but you can still work within the field of massage therapy – just somewhere else or outside of your specific area of expertise.

However having said that, this is the most common form of insurance people purchase.

 

Own Occupation

This is the crème-de-la-crème of definitions of occupation, and is only usually purchased by very specialized (and high-income) medical professionals and executives. It is rarely if ever part of a workplace group disability plan.

It states that if you are unable to perform the duties of your “own occupation”, you will receive benefits. So if a specialized doctor can’t attend to their own patients in their own clinic, they will receive benefits. (Never mind if the doctor could perform medical services elsewhere or in a different area of specialty).

 

Two kinds of Disability Insurance

Short Term Disability (STD)

STD is typically only used as a rich benefit by workplaces, as it is cost-prohibitive for individuals and can often be circumvented with proper emergency fund planning. It provides for a replacement of income if you are disabled starting as early as three days after the disability occurs, and lasting up to six months (usually 90 days though).

Some workplaces will provide short term disability coverage, but not through an insurance company. Instead they will pay your salary out of pocket until the long term disability coverage kicks in, as they see it as being less expensive overall than paying the pricey premiums for STD.

 

Long Term Disability (LTD)

This is the most common form of insurance (both within workplaces and for individuals requiring coverage). The average policy has a 90 day waiting period, and benefit periods ranging from two years to age 65.

 

Important Terminology

Waiting Period

Sometimes referred to as the qualifying period or elimination period, this is the amount of time you have to wait between when the disability occurred and when you will start to receive payments from the insurance company. The longer the waiting period is, the less expensive your premiums will be. (The flip side being of course that you have to foot your own expenses for that length of time).

The standard waiting period for Long Term Disability is 90 days, but can be as long as 180 days or as short as 30 days. Short Term Disability can have waiting periods as short as just a few days.

 

Benefit Period

Although this goes by a few different names as well, it refers to the length of time disability payments will continue once they start. If you have a two-year benefit period with a 90 day waiting period, then you will receive two full years of payments starting 90 days after you became disabled. It is worth noting that payments will stop as soon as you are deemed able to resume your work, even if the benefit period has not yet expired.

 

Benefit Amount

This is the amount of money that is paid each month as disability income. There are regulations around how big the benefit amount can be (usually a maximum of 70% of your gross salary), since insurance companies don’t want to fully replace your pre-disability after-tax income. The rationale is that if your cash flow is fully replaced while disabled, you don’t have much incentive to get better and off the DI cheques.

 

Premiums

This is the monthly fee you pay for your insurance. The shorter the waiting period, the more you pay. The longer the benefit period, the more you pay. The higher the benefit amount, the more you pay. The older you are, the more you have a volatile family medical history, or a volatile personal medical history, the more you pay.

Some policies lock in your premium rates for life based on your age, health, and medical history at the time of application. Other policies will rate the premiums, increasing them every few years (and within this realm some will guarantee what your rate increases will look like while others retain the right to increase premium rates by any amount and at any time).

 

 

Perilous Pitfalls

Taxation of Premiums and Benefits

In Canada (and I believe in the U.S. too), how you pay your premiums affects how the benefits are taxed. This is especially important, because if your DI benefit payments are taxable and are only 70% of your gross salary to begin with, you will be lucky to end up with half of what you used to bring home after-tax to live on (and with possible increased medical expenses to boot).

Basically if you deduct your DI premiums from your taxes (which those who are self-employed are entitled to do as a cost of doing business), your benefit amount will be taxable. If you instead use after-tax dollars to pay for your premiums, then the DI benefit amount is non-taxable.

Hence, my advice is almost categorically to ensure that you do not deduct your premiums, and if participating in a workplace plan ensure your employer is not paying for the premiums and instead is deducting them from your net pay. A little short term premium pain will result in long term survival if you become disabled and dependant on the benefits being tax-free.

 

Making Claims

Although you may have a legitimate disability claim and a waiting period of a few weeks, you may be surprised to discover that the cheques aren’t flowing like they should at the end of your waiting period.

In order for your DI payments to start, the insurance company needs to make darn sure that your claim is legit. So they will order third party doctor’s reports, additional tests, or other forms of clarification to ensure they are really on the hook. This can take time, and often surpasses the initial waiting period. Rest assured that once approved, payments will be retroactive, but it can be a terribly sore bone of contention for those in need of benefit payments.

 

A Note About Group Disability Plans

Many people rest well at night knowing that they have disability insurance coverage through work. What they don’t know is that they might only have an LTD plan, with a waiting period of 6 months, a benefit period of two years, “any occupation” as their definition of coverage, and their premiums are fully paid for by their employer and not taxed. This means that the employee is on the hook out of pocket for 6 months after the disability occurs, they have to be severely disabled to even qualify under the “any occupation” definition, and even if they do qualify their benefit amount will be fully taxed such that they will be lucky to see even half of what their previous take-home pay was.

Or, work plans will often cover under the “regular occupation” definition for the first two years, then switch to “any occupation” until age 65. People take comfort in thinking that they have coverage to age 65, but realize sadly that after two years they are being denied coverage because they are reasonably skilled or trainable for another job under the “any occupation” definition. It is worth noting that statically speaking, the average length of a long-term disability is longer than two years.

 

 

Do I think that people need disability insurance? Absolutely I do. But I also think that people who have coverage and think they’re golden should carefully examine their policies to ensure they don’t get caught in the typical DI pitfalls and end up penniless (and bitter with insurance companies) when they are in critical times of need.

 

If you want to re-examine your policy for cost-effectiveness, check out this article with a tool to help you potentially save a few extra bucks.

 

Disclosure: I have no affiliation with any insurance companies or vested interest in disability insurance.

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Guest's picture

I'm a regular reader who's about to lose employer-sponsored disability insurance, and I'm about to explore my options of paying for my own coverage. This was a great primer - thanks so much!

Guest's picture
Hope

Any tips on how to find good agents/companies who actually handle disability insurance, either online or in person? I've done a lot of searching, but there doesn't seem to be many options out there--not like auto or life insurance. :-(

Guest's picture
Lucille

Disability benefits that are paid or partially paid by your employer also fall under ERISA law. This is a deal with the devil that the government made with the insurance industry. What it does is ties the hands of the employee and limits your ability to sue if the insurance does not cooperate.

You then can't sue for damages for the headache and problems the insurance company caused by denying the claim and dragging it on for years. It also limits some other avenues for recourse you would have under insurance policies you bought on your own. The other big icky secret is that any money you get from a policy that is under ERISA and all or partially employer sponsored is that money you get is taxable and at a rather high rate.

If you have the option to maybe get your employer to pay you more in trade for not having the LTD through them so you can use that extra money to shop around and buy your own policy you could come out way ahead if something bad happens.

Really research the insurance companies too, some have horrid reputations for denying claims and harassing claimants. Even if your employer is paying for that LTD insurance if the company is a total nightmare you might want to go buy your own insurance because theirs could be utterly worthless.

Guest's picture
Debbie M

Wow. I never heard of those three definitions of occupation, and normally I do read the fine print on this kind of stuff.

So I checked out the insurance I have and learned that it is for my regular occupation (whew) but only for two years. So it's good to know that I have two years to find and train for a new occupation if I get a disability that lasts that long.

As for short-term disability insurance, I don't need it. I now have enough sick leave saved up that I am covered for many months at my full salary.

Guest's picture
Amy K.

I hadn't read the details before. My company pays for 6 months STD at 60% of gross pay and their LTD is 24 months "your occupation", the remainder "any occupation", based on my reading: "During the first 24 months, the plan pays benefits for any covered disability
that prevents you from working in your occupation. After 24 months, the plan provides benefits for any covered disability that prevents you from working in a reasonable occupation."

What is reasonable to them? I'm not sure. But this is a good heads-up that I'll need to focus on retraining, not just recovery, for those 24 months. I'll also have to check my supplemental LTD, which I believe is the "your occupation" type for life, but it covers the other 40% of income.

Guest's picture
Guest

We are survivors of the pitfalls of disability insurance through my husband's employer. We fought long and hard to get covered for two years. Hired an attorney (cost $5,000, luckily they reimbursed us after we won the court case) and they deducted all they had paid us up to the point of disqualification from our Social Security Benefits. Our attorney warned us that the disabililty insurance offered by employers is really a joke. Be really careful choosing your policy.

Nora Dunn's picture

I'm so pleased that people are re-examining their existing policies now that you are primed about the finer points. It pays to know exactly what you have, and not to rest on laurels of coverage that may be inappropriate.

And Guest, it is because I have heard too many stories like yours that I was inspired to write this article. Thank you for sharing your story.  

Guest's picture

We need to get ourselves some long term disability insurance. We never realized how important it was, until one of our friends injured themselves and couldn't work for months.

Guest's picture
Shelby

My husband was disabled and we were lucky to have decent LTD coverage, or so we thought. My husband was diagnosed with Bi-Polar Disorder. Because the disability was a mental illness, his disability payments were cut off after two years. Had he just broken his back and was paralyzed he would still be getting payment.

One thing that happened that really was to our benefit rather than the insurance company was that I refused to submit the paperwork for Social Security Disability thru the insurance company. They wanted to be sure that if he received any SSD benefits that they got their share. He was luckily approved for SSD and they didn't get a penny. If I had listened to the insurance company and submitted his SSD claim thru them, they would have taken any and all back pay he was entitled to. That back pay allowed us to get by until we could downsize our house and get a handle on our extra expenses.

Please don't make the mistake of thinking that the insurance company is going to look out for your best interests. They are likely trying to do what is best for their executives and stock holders.

Guest's picture
The Torp

To the writer who claims by not going thru the company they are then prevented from coming after you... Wrongamundo - at some point you will most likely receive a dcoument declaring receipt of "other funds". These other funds allow these insurance companies to make futher adjustments to the abysmal amounts one recieves. Initially, the company will try to strong arm you to file and may even offer up their attornies for free... I suppose free is relative. In other cases, there are companies that can "estimate" the cost you might receive and begin making that adjustment instead. The risk management approach they use is typically not for the benefit of the recipient.

The point of the article in many places is well taken. In essence the 80% of salary on STD is short lived followed by the mistaken belief of many that on LTD it will be 60% of your salary. In fact, once LTD is reached the "adjustments" can further reduce it to 21% excluding federal and/0r state taxes that are also due esepecially on a Group Policy (my experience here says based on how much you make one typically makes "premium" payments in addition to the company payments for LTD insurance). The part you pay is not taxable but the other part is on federal and in the state of Mass. Be especially vigilent of the W2 as they may not indicate State Wages and then find out later you are getting a bill for the amount plus penalty and interest.

The company I worked for recently decided that employees who have been on LTD will now need to ALSO make preimum payments for their Medical Premiums that current active employees make. Previously, they had waived this payment due to Good Will and circumstances. Of course, they don't prorate it even though the once active employee is no longer making 100% of their salary as they once did nor provide other avenues available to active employees.

Knowing this, the article points out private disability insurance which is a good thing but be aware - if you are unable to drive to work, some like Mass Mutual will fight you tooth and nail as to that being a "job related requirement". Thus some of those examples used that seemed silly aren't so sill after all. Expect one heck of a fight in the early going that if approved is followed by a mountain of "follow-up" forms, claims, approvals, doctor visits... Frankly, these companies apply so much pressure and documentation it is no wonder that phyisicians want no part of it!

Nonetheless, plan your private DI amount well especially after all the adjustments that can be made will be made to your LTD. While I had private DI, I did not do my homework on the "adjustments" and was lulled too sleep on the 60% threshold for LTD. Pay for the entire premium, if you can, as the article suggests as that eliminates the tax worries.

Good luck and when the insurance rep comes to your house (or you go there) to take an oral statement - be very careful of what you say as they are not there to really help you.

Guest's picture
Donna

I'm a Massage Therapist,
I work for a day spa that does not offer insurance and i need to find a desent
insurance company. Does anyone have some good recommendations for me and also the cost?

Thankyou Donna Norgel, CMT

Guest's picture

Almost 3 in 10 of today's 20-year-olds will be disabled before reaching the age of 67. Disability can prevent you from working and paying your bills.
This article by Linda Rey talks about who should consider disability insurance, how much disability costs, and how one can go about getting disability insurance. http://bit.ly/av0MSB

Guest's picture

Almost 3 in 10 of today's 20-year-olds will be disabled before reaching the age of 67. Disability can prevent you from working and paying your bills.
This article by Linda Rey talks about who should consider disability insurance, how much disability costs, and how one can go about getting disability insurance. http://bit.ly/av0MSB

Guest's picture

Sorry, I didnt mean for that to be posted twice. I think something went wrong.

Guest's picture
Guest

Terrified but neccessary I am beginnng to plan for my inevitible disability as I have been able to endure 20+ years in the work force with Rheumatoid Arthritis but now am experiencing the disabling effects of 42 years of the disease and am looking at STD just to rest my body in the hopes of recovery to try again. Can you provide any good resources or professionals in Indiana that would be in my corner and help me get a good foothold before the insurance company comes at me with all their might?