Guest Commentary by Martina B. Sherman & Mark D. DeBofsky
DeBofsky Sherman Casciari Reynolds, P.C.,
It’s estimated that one in four people entering the workforce today will experience a disability lasting a year or more before they reach retirement age.1 Many of those impacted are eligible for Social Security disability benefits, but Social Security Disability Insurance has many limitations. First, it typically provides only 50% income replacement, and benefits are capped at $2,861 per month. Moreover, the wait to qualify for Social Security disability benefits can be long, as much as two years or even longer. Finally, if you are under age 50, the test to qualify for disability is extremely onerous, requiring that you demonstrate the inability to perform even unskilled, sedentary work.
Given the forgoing constraints, individuals with private disability insurance are in a fortunate position to better protect their income. The most desirable coverage is individual disability insurance that pays a fixed monthly benefit and insures against the inability to perform the key duties of one’s occupation, or even a specialty within that occupation. Benefits may also be payable for partial disabilities or even a loss of income following a recovery from illness or injury. It is also possible to purchase insurance to cover fixed business overhead costs in the event of disability. When premiums for individual coverage are paid with after-tax dollars, the benefits are not subject to federal income taxation.
In contrast to individual disability insurance, many organizations purchase group disability insurance for their members and employees. Those benefits typically represent a percentage of salary and are more likely to be taxable. Group disability benefits are also generally subject to offsets, which include Social Security disability payments (both for the insured and their dependents), workers’ compensation benefits, tort settlements, and unemployment benefits, to name a few. Thus, instead of a supplement, such coverage is more like an advance on the Social Security or other benefits for which the worker has applied and will ultimately be forced to repay to the insurer.
Group coverage is also not necessarily focused on the insured’s occupation or specialty–most group policies provide two years of “own occupation” coverage followed by “any occupation” coverage that requires the inability to perform any gainful occupation for which the insured is reasonably qualified and closely resembles the standard utilized by the Social Security Administration. In addition, group coverage is more likely to include provisions that limit the duration of benefit payments for certain specified conditions such as psychiatric disorders or other illnesses deemed “self-reported” such as migraine headaches, fibromyalgia, and chronic fatigue syndrome. Finally, group coverage is usually subject to the Employee Retirement Income Security Act (ERISA). The applicability of ERISA limits both judicial remedies and court procedures, giving greater advantages to insurers in the event of a dispute over benefits.
One advantage the group disability coverage enjoys over individual insurance, however, is the lack of any underwriting requirement. Instead, most employer-sponsored disability plans impose a 12-month pre-existing condition limitation. Thus, if you obtain group coverage and remain employed for at least 12 months, you may qualify for disability benefits even if you suffer from an illness or injury that would otherwise disqualify you from individual coverage.
In conclusion, if your means allow it, individual disability insurance is the surest way to protect your income against unforeseen accidents or illness. However, if individual disability insurance is cost-prohibitive, or if you suffer from a pre-existing condition that would cause you to fail underwriting, then group long-term disability insurance can provide a critical bridge while you await a determination on your Social Security disability claim.
1 Social Security Administration, Disability and Death Probability Tables for Insured Workers Born in 1997, Table A.