Disability Insurance Basics

This is a companion to two other pieces on this site, A Pragmatic Look At Filing A Disability Claim and The Social Security Offset. They're long and there's some duplication, but if you're looking at disability you won't regret reading them. You might want to print out all three and read them in bits and pieces.

Get ready for a complicated discussion. I’m going to make this as orderly as I can, but when it comes to disability insurance there is no way to be simple. There are too many details to cover for this to be an easy read, so you're going to need to print it out and read it in sections -- more than once. I've written it in terms of multiple sclerosis, but the information here is broadly applicable.

So, roll up your sleeves. I’m going to start with a sort of checklist of simple, general statements.


IN GENERAL ...

Prepare for disability
If you have multiple sclerosis, there’s a strong chance that you’ll eventually be disabled. I looked up some numbers from the Census Bureau a while back, and they showed that two-thirds of women and four-fifths of men with MS are disabled.

I think those percentages are too high, by the way. For a variety of reasons, doctors are catching more early, mild cases of MS than they used to. Therefore, I think the percentage of MSers who will be disabled is a lot lower than the Census numbers would imply. That said, if you have MS you still ought to think about disability. Maybe you’ll be preparing for a war that doesn’t happen, but that’s far preferable to being caught by surprise.

Get insurance now, if you can
If you’re reading this because you’re worrying about symptoms but you haven’t yet told a doctor about them, the very first thing to do is to get as much disability insurance as possible. Why? Because once you’ve told a doctor about your symptoms, you’ve almost certainly made yourself off-limits to most disability insurance companies. They want to sell insurance to healthy people, not to sick people. So get on the horn to an insurance agent. Pronto!

A diagnosis is not a disability
You must have the disease and be unable to work according to the rules of whoever pays your benefits.

Your doctor must be on your side
When it comes to going on disability, your word isn’t enough. Someone else has to agree. One of them must be your neurologist, and another one should be your primary care doctor.

Read your insurance policy
When it comes to insurance companies and disability, forget about those "like a good neighbor" ads on TV. They’re not your family, or your friends. They’re financial companies that collect premiums and pay claims according to their contracts, which are known as insurance policies. You get what the contract says you get. Your need for the money is irrelevant, so don't expect the insurance company to pay special attention just because you need the money really bad.

A related point. If you become disabled, make sure to get a copy of your LTD policy. I'm not talking about that little booklet, I'm talking about the big kahuna. It is known as the "Summary Plan Description," or SPD, and it typically runs for about 20 or 30 pages of fine print. Ask your human resources department for a copy of the SPD for the disability coverage in effect at the time you became disabled. If they don't send it, then send them a certified letter asking for the SPD. Federal law requires them to provide you with this document upon request, and there are substantial penalties for non-compliance.

Social Security is an insurance policy, too
The only difference is that Social Security is funded by the taxpayers and administered by the government. When it comes to benefits and rules, it works just like an insurance company.

Get a lawyer
Most people hire lawyers when it’s too late to do any good. It comes from watching all those TV shows where the lawyer saves the day at the last minute. I am strongly in favor of seeing a lawyer before submitting any claim forms. Find someone who is experienced, diligent, and reasonably sympathetic. Always interview at least a couple of attorneys. Ask about the fees up front. Once you’ve agreed on the fees, pay them. These people have to eat, too.

My lawyer said he has the hardest time collecting when he got the benefits without ever going to court. Clients try to argue that he didn't do anything special. Have you ever heard anything so stupid in your life? Here's the deal, cheapskates: When you hire a lawyer you are hiring every case he ever worked on. And the best professionals regardless of what field they are in make it look easy. Pay your bill.

It’s O.K. to go on disability
If you’re guilty or embarrassed about going on disability, far be it for me to dictate your feelings. All I’m going to say is that, like all those handicapped parking spaces out there, disability insurance exists for the disabled. You’re not required to work until you drop dead. If you’re still worried, see a shrink. Pay cash and don’t give your real name. If you're still feeling guilty, try reading my essay on guilt.

Dry your tears, honey: Keep your wits about you
Now is not the time for emotion. It's time to read your policy and have frank discussions with doctors and lawyers, and to do it before you file your claims. When it comes to talking with the insurance company, the less said to them the better. You're much better off dealing with them in writing, as opposed to calling them up.

Oh, and about that lawyer. It is very much in your interest to keep him in the background. Don't go threatening your insurance company with a lawsuit. You think it will scare them? Come on, they have all kinds of lawyers on staff just looking for something to do. All it will do is slow them down while they triple-check everything and ponder what sort of idiot would think they'd be scared of a lawyer.


TYPES OF DISABILITY INSURANCE ...

O.K., now for the complicated stuff!

There are three major classes of disability insurance. Please keep the acronyms clear in your mind (or write ‘em in big, bold letters on your printout), because I’m going to be using them throughout and you don’t want to get them confused!

Social Security Disability Income, also known as SSDI
If you've been paying Social Security taxes, you're probably covered. The benefits vary according to how long you've been employed and how much you've been paying in Social Security taxes. There is no "means testing," meaning that if you're eligible you get SSDI regardless of how much other income you have. The only people not eligible for SSDI are those who haven't worked long enough, along with some state and local government employees covered by their own systems. Those who aren't eligible for SSDI or other programs should look into Supplemental Security Income, also known as SSI. That's a federal program for people who have little or no other income and not much by way of assets. It pays a pittance, but it's better than nothing.

Group long-term disability insurance, also known as LTD
If you’re working, there’s a good chance that your employer provides LTD, most likely through an insurance policy. Many employers also provide short-term disability coverage, either through a separate policy or as a consequence of sick-leave policies.

Individual disability insurance, which I will call DI
People who don’t have LTD sometimes also buy DI. Others who make a lot of money frequently buy DI to cover the gaps in LTD and SSDI.


THE TYPICAL WORKER: SSDI and LTD

Most people have a group LTD policy offered through their employer, and because they are working they are also covered by SSDI. For efficiency’s sake, I’m going to talk about SSDI and LTD together. This is because, at least financially, they usually work hand-in-glove. Here’s how it starts: You and your doctor decide you’re disabled. You resign from your job. You file a claim with your insurance company and with Social Security. And for the next several months, you don’t get a lot of sleep as you worry about whether your claims will be approved.

If you have typical LTD insurance, it will pay either 60% or two-thirds of your pre-disability earnings to a maximum level, often $5,000 or maybe $7,500 a month. Now here’s the kicker: Almost all LTD policies count your SSDI as part of the two-thirds of past earnings. This means your LTD benefits are reduced by whatever SSDI pays. Some people go crazy when they find out about that. But remember what I wrote above about reading your policy? If you had wanted more coverage, you'd have bought it.

You didn't know? Never thought about this stuff? Okey-dokey, but whose fault is that? When you started on the job they gave you a little booklet concerning your disability insurance benefits. You know, the one you tossed in the bottom of your desk drawer and told yourself you'd read someday? Yeah, that one. So if you're looking around for someone to blame because you didn't have enough insurance, might I suggest finding the nearest mirror?

When you file for LTD, your policy will require that you also file for SSDI. If you fail to do this, your insurance company will simply deduct your potential SSDI benefit from whatever they pay you. This is because the LTD policy really is insurance for the difference between SSDI and whatever percentage of your past income mentioned in the LTD documents.

Let’s imagine you filed your SSDI and LTD claims on, oh, January 1st. The insurance company will probably make its decision on your claim by March 1st or April 1st. If you’re really lucky the government will go that fast, too, but it’s quite possible that Social Security will deny your claim and give you the run-around. These run-arounds have been known to last for years on end. I know a guy who waited for just short of a decade. Let me hasten to add that this is rare. Really rare -- although if the Republicans get away with squeezing Social Security like they want to, maybe it will become less rare. Hard to say.

If you have LTD and if your insurance company has accepted your claim, guess what? If the government rejected your claim, LTD will pay the entire percentage of your working income specified by the policy including the government’s share. But there are some conditions attached. One is that you must appeal any government denial of benefits – with the insurance company paying for a lawyer to represent you. Secondly, if the government eventually decides in your favor and awards you back pay for the benefits that had been denied, that money belongs not to you but to the insurance company.

(Important: For complete detail about the offset issue, see The Social Security Offset posting on this website.)

Some people get really mad about sending the government’s back-pay award to the LTD carrier. These people conveniently forget who was paying the government benefits while they were waiting for their appeals to be heard. And they didn't read the LTD policy, and you know how I feel about people who don't bother to read their insurance policies. A side note: The back-pay award from Social Security is taxable, but a reimbursement to the insurance company is tax-deductible. In other words, it’s a wash. Bottom line: If you’ve been collecting LTD while waiting for SSDI, don’t spend the back-pay award. It’s not your money.

At this point, you might be wondering why you should have bothered to appeal a government benefit denial in the first place. The LTD carrier will pay the full amount anyway, so what’s the difference? Well, there are several answers. The first answer, of course, is that your LTD policy will require you to appeal. But there are two powerful reasons why it would be in your interest to appeal even if that requirement didn't exist. And there’s a third reason that’s less powerful at the moment, but still relevant.

You see, SSDI isn’t just about disability. There’s a five-month waiting period before you’re eligible for SSDI checks. Once you’ve been eligible for 24 months, you also qualify for Medicare. For an MSer and just about everyone else with an expensive, chronic disease this is a big, big deal. Medicare isn’t perfect, but it’s one hell of a lot cheaper than regular health insurance. And they can’t cancel you. The other powerful reason is that, once you’re declared disabled by Social Security, you’re treated as if you’ve retired. If not for that, the formula for calculating your eventual retirement checks would have considered you unemployed rather than disabled, and your future retirement checks would be cut way back.

The third reason to appeal a negative ruling is currently less powerful than the other two, but you never know what will happen. SSDI benefits are indexed for inflation. LTD benefits rarely are indexed, but LTD will not keep cutting its benefits to counteract SSDI’s inflation adjustments. As time goes by, this could matter more than you think! For example, let’s say you made $60,000 a year at the time you were disabled. Under a typical LTD plan, you’d get a total of $40,000 a year, which is $3,300 a month.

About half of that would come from SSDI, and it would grow with inflation. Anyone remember the 1970s? Half protection is better than no protection. If you don't want your COLAs, please send me an e-mail and we can arrange for you to send me the money. I promise to give it to charity, my favorite being a certain distillery west of Edinburgh.


THE FINE POINTS OF LTD AND SSDI

Definition of disability
How are you judged to be disabled? First a general statement. As I write, people with MS are being treated pretty well by most LTD carriers and by Social Security. I haven’t heard about too many denials of claims. But you can never pay too much attention to this issue! Typically, SSDI will cover MSers who have serious mobility issues, heavy fatigue, or severe cognitive deterioration as documented by neuropsychology testing results. Your status will be reviewed periodically, ranging from every three years to longer.

LTD carriers will typically pay full benefits for two years of inability to perform the major duties of your own occupation. After that, they’ll see if you’re able to perform the major duties of any occupation for which you are qualified by training, education, or experience. Typically, you have to be realistically capable of earning at least two-thirds of what you earned when you were working, and that threshold is usually adjusted for inflation. Some helpful advice from a former insurance executive now disabled by MS: Make certain that all of your symptoms are documented by your doctors, especially fatigue.

Here's another little gem: When you're filling out the claim forms, you'll notice that they usually give you one or two lines to say what you did for a living. Now, the fact that they give you so little space doesn't mean you have to use so little space. Just write "see attachment" on that line. Write a separate statement that goes over your job duties in loving detail and submit it along with the forms. Have your lawyer look at it, and maybe run it by your doctor.

Waiting peroids
You start with your disability date, which is usually the day you stopped working. That's when the clock starts ticking on the waiting periods, which in private policies are also known as "elimination periods." LTD typically has an elimination period of 90 days. This is so you don't double-dip from other sources of income like sick pay or, for those who get it, STD or short-term disability coverage. Social Security pays benefits starting in the sixth full month of disability; in other words, it has a waiting period of five full months. Some LTD policies will say 90 days from your final paycheck.

Let's take SSDI and the five-month waiting period. Imagine your disability date is June 17th. June doesn't count as a full month, so your waiting period consists of July, August, September, October and November. Your first benefits are payable for December. Social Security (and lots of insurance policies of all kinds) pay one month in arrears. In this example it means you get December's check in January.

When it comes to DI (discussed in the next section), the elimination period is one of those negotiable features that goes into the price of your coverage. You can buy a 90-day elimination period, a 180-day elimination period or something even longer. Chances are if you're buying DI in addition to your other coverage, you can afford to wait a little longer for that first check. A lot of people buy a 180-day wait in return for a lower premium.

Taxation of benefits
80% of SSDI benefits are taxable at whatever the tax rates are at the time. LTD premiums are cheap, which is why employers are usually happy to offer the coverage. The benefits are taxable if your employer paid the premiums. But if you pay the premiums, or if you have been careful to declare their value as taxable income every year on your 1040 form, then your group LTD benefits will be non-taxable. The tax law has recently changed in such a way as to make it easier for companies to include the value of premiums in an employee's taxable income. I strongly recommend either paying your own LTD premiums or having your employer add the premiums to your income. Talk with your personnel department. It could be the smartest thing you ever did.

Appealing benefit denials
SSDI has a multi-stage appeal process. At the first stage, all claims are handled by a state agency. Denial rates vary quite widely, with some states being notorious for denying just about every application on the first try. Eventually, the appellate process reaches a federal level, and ultimately about half of all claims are accepted. I have never heard of an MSer whose SSDI claim was ultimately rejected. But it could take quite a while, and if you’re not getting LTD in the meantime it can be a rough road.

Lawyers who handle SSDI appeals are limited by federal law to charging 25% of your award. If you’re also on LTD it doesn’t matter; the insurance company will demand repayment of your back-pay award after the lawyer’s share has been deducted. If you didn’t have LTD, the 25% lawyer’s share comes out of your own pocket. I realize this is a hardship, but I urge people whose SSDI claim is denied to hire a lawyer. In fact, I think it’s a good idea to see a lawyer before filing it – but then I’m a cautious sort.

On the LTD front, appeals can get hairy, and I’m going to discuss those issues in the next section.


DI: THE GOLD STANDARD OF PRIVATE INSURANCE

You typically buy a set benefit amount, such as $5,000 a month. A healthy person in his or her 30s would usually pay an annual premium of one-third the monthly benefit. Thus, a benefit of $5,000 a month might cost $1,700 a year or so. Straight out of your own pocket. Expensive! No wonder it’s not very common, but DI is great insurance for a variety of reasons.

For starters, because you pay the premiums yourself the benefits are non-taxable. Secondly, they don’t affect benefits from any other source. If you are eligible for $5,000 a month in DI benefits, you can still collect your full SSDI, your LTD and be eligible for Medicare. Thirdly, there are multiple "riders" available, such as the ability to inflation-adjust or otherwise increase your benefits, or have the coverage not just to retirement age but for life. Fourthly, DI is typically "own occupation" insurance. If you’re a computer programmer and your MS prevents you from doing the duties of your job, you get the benefits even if you can – and do – wind up in an occupation with different duties.

Finally, because different laws cover DI and LTD, it’s a lot harder for a carrier to deny a DI claim than it is to deny an LTD claim. Take Aetna Insurance, for example. They sell LTD to employers and DI to individuals. There is documented evidence that Aetna told its claims reviewers to be tougher on LTD claimants because the law makes it a whole lot harder to appeal an LTD claim denial.

There are whole books written on the differences, but I’m going to boil it down. DI is covered by state law, and states are usually tough on insurance companies. Why? Because in most states, the insurance commissioner is an elected official. Under state law, if an insurance company acts capriciously or outrageously, the claimant can sue for the benefits not paid plus for punitive damages for the carrier’s "bad faith." LTD, on the other hand, is governed by a federal law that specifically prohibits bad-faith damages. No matter how outrageously an LTD carrier acts, you can only get what you were owed anyway. Not a lot to deter outrageous conduct, and the insurance companies know it.

Beyond that, state laws usually require DI carriers to come up with plenty of proof before overruling the opinion of your doctors with respect to your disability. Federal law is a lot easier on the insurance companies. Even if they wrongly deny your claim, that denial can be upheld if they can show that they acted "reasonably" when they made the error. Talk about a loophole big enough for a semitruck! But this is what the U.S. Supreme Court has decided. And they’re right to have decided it that way, because the federal law is clear on the matter.

The law, incidentally (accidentally?), is called the Employee Retirement Income Security Act, or ERISA. It has been denounced ever since it was passed in 1974 as a "reform." But no one can ever get it changed. Not that the insurance companies have lobbied Congress to keep it just as it is. Nope, nothing like that would ever happen in America. That said, however, I haven’t heard of MSers being denied too often under ERISA. But that’s no guarantee! Oh, by the way, when it comes to your doctors and their opinions, Social Security uses pro-claimant rules similar to those used by DI carriers.

I hope I haven’t lost you by now. I told you it was complicated, and I’ve only scratched the surface! Do you see why I hired a lawyer at the front end of the process to advise me on how to fill out the forms? Glad I did, too, because three insurance companies and Social Security accepted my claims on the first try.


SUMMARY & FINAL THOUGHTS

Get as much as insurance as you can
If you haven’t seen a doctor yet but suspect MS or something else that’s serious, the first person to call is a DI agent. Get as much individual DI as they’ll sell you. In fact, if there’s nothing wrong with you it’s a good idea to have DI. I had it for a decade before using it, and it took two months of benefits to get all my premiums back. (Oh, and don’t lie on an insurance form. They’ll find out.)

Read your insurance policies
With LTD, the booklet from the employer will be enough to give you a general idea of the coverage. A request for the full policy, while being your legal right, could serve as a tip-off that something’s wrong. Employers have been known to fire people if they think a serious medical issue is coming up! But once you go out on disability, make sure to obtain a copy of the Summary Plan Description of the coverage in effect at the time of your disability.

Start a medical file
Save all doctors' notes, reports, and copies of MRI films and other test results.

Make sure your doctors document your all of your symptoms
Especially fatigue. You can help by making a one-page, bullet-point list and giving it to your doctors at every visit.

Don’t cut your work hours
Do not drop back to a part-time schedule in hopes of being able to stay on the job. All you’ll accomplish is the reduction of your future disability income. If it turns out you can work part-time in the future, you can return to work and your LTD and DI policies will likely make up a bunch of the difference between your former earnings and your part-time income. Now, doesn’t that sound better?

By the way: If you have one of those high-pressure jobs where you work 60 hours a week, keep something in mind. Disability policies tend to say that you’re disabled if can’t work 40 hours. They don’t insure your ability to work like a dog.

Pay attention to the tax issue
Either pay your LTD premiums yourself or declare your employer’s payments as taxable income so your benefits will be tax-free. Oh, do I ever wish I had thought about this!

Lose the emotion
Especially the guilt. Look, the MS is going to do what it will do. Filing a disability claim is about the money, not the disease! And do not, not, not call your insurance carrier crying about your desperate need for the money. Who do you think they'll stiff-arm first, a person who's on the brink of bankruptcy and can't fight back, or someone who is calm, cool, collected and shows every sign of being about to sustain a long fight?

For more information
For Social Security info, go to their website for more information. When it comes to LTD and DI, this site is outstanding. People will often give you a bit of advice there on SSDI too. And one last thing: Everything I've written is the result of my experience and my reading on the subject. But I'm not a lawyer, an insurancce agent or a government official. So proceed at your own risk, because I'm not guaranteeing the accuracy of any of this.