LTD benefit less than expected - common?

[DAK]

In helping with my mother's claim on her Group LTD policy, I came across a feature that was a surprise.

They reduce your benefit by any social security disability insurance you receive.

So in her case if her income was 10k/month and she had a 60% replacement, her benefit should have been 6k. She paid her premiums post-tax so the benefits should be post-tax.

But with $2.5k of SSDI, the private disability monthly payout is reduced to $3.5k.

And then on top of this the SSDI is partially taxable.

Is this a common feature of LTD plans? I haven't seen enough to know. Seems like it might influence someone to by more LTD.

[Derek True]

Most group LTD and some association plans offset for not just benefits received from SSDI, but also worker's comp. and several other potential sources.

Individual DI policies, however, rarely offset with benefits received from SSDI, worker's comp., etc. Some can but those from the "Big 6" that provide specialty-specific own occupation definitions only offset in small amounts IF you specifically elect the rider to do so in order to save premium. This is rarely elected outside of blue-collar markets though.

[Scott at MD Financial Services]

It is 100% common.

In fact, that benefit offset provision in group policies goes as far to say that if she had dependents (they receive benefits if she does) then any benefit paid to those dependents would also be reduced from her employer policy benefit payout. In addition, other reductions are for getting hurt or sick on the job where workman's comp kicks in and pays benefits. You will also see benefit reductions for personal injury settlements, no-fault insurance payouts, association disability plans (think AMA, other medical association plans), sometimes distribution from a 401k and the list goes on. If you are really curious about this just ask for a copy of the employer policy, read the section called "income benefit offset", nobody ever reads this section or even looks at the policy but everyone is shocked when it happens.

It is a real problem because most can't live on what they would receive from their group plan once a claim is fully adjudicated.

[Ethan Abramowitz]

This is an all too common situation with Group LTD policies with devastating financial consequences.

To Scott’s point, you should review this section in the Group LTD policy. While your mother was required to apply for SSD, she might have other deductible sources of income that she is not required to access at this time; however, if she does access same her benefit will be reduced further.

With respect to the SSD offset, the only thing I would add to Scott’s reply is that you should double check the policy language regarding Cost of Living increases. Most Group LTD plans base the Social Security Disability offset on the initial Social Security award. If this language is in the LTD policy, the company will not increase the offset when SSD increases the benefit annually.

[DAK]

Sorry for being late in responding, but thanks for getting back to me on this one.

I'm not sure if WCI has mentioned this offset during his suggestions that folks get disability insurance. If not, or even if he has, it seems like it would be a relevant factor encouraging people to get private disability insurance sooner rather than later, rather than relying on the group LTD. Given WCI makes money from disability advertisers, I'm surprised I haven't heard Jim mention this - or else I wasn't paying close enough attention.

A quick search shows it addressed in 2012: https://www.whitecoatinvestor.com › why-i-bought-a-group-disability-insurance-policy

But a more recent article from 2021 does not seem to mention it in a brief mention of the cons of Group LTD: https://www.whitecoatinvestor.com › guaranteed-standard-issue-disability-insurance

[LBKCLU]

This post mentions the offset for Social Security https://www.whitecoatinvestor.com/di...s-your-wealth/

[The White Coat Investor]

Sorry for being late in responding, but thanks for getting back to me on this one.

I'm not sure if WCI has mentioned this offset during his suggestions that folks get disability insurance. If not, or even if he has, it seems like it would be a relevant factor encouraging people to get private disability insurance sooner rather than later, rather than relying on the group LTD. Given WCI makes money from disability advertisers, I'm surprised I haven't heard Jim mention this - or else I wasn't paying close enough attention.

A quick search shows it addressed in 2012: https://www.whitecoatinvestor.com › why-i-bought-a-group-disability-insurance-policy

But a more recent article from 2021 does not seem to mention it in a brief mention of the cons of Group LTD: https://www.whitecoatinvestor.com › guaranteed-standard-issue-disability-insurance

The policies sold by the folks I recommend don't generally have this feature. But it's pretty common in group policies.

I've got a conflict of interest of course, but not the one you're worried about.

[FIREshrink]

It is 100% common.

In fact, that benefit offset provision in group policies goes as far to say that if she had dependents (they receive benefits if she does) then any benefit paid to those dependents would also be reduced from her employer policy benefit payout. In addition, other reductions are for getting hurt or sick on the job where workman's comp kicks in and pays benefits. You will also see benefit reductions for personal injury settlements, no-fault insurance payouts, association disability plans (think AMA, other medical association plans), sometimes distribution from a 401k and the list goes on. If you are really curious about this just ask for a copy of the employer policy, read the section called "income benefit offset", nobody ever reads this section or even looks at the policy but everyone is shocked when it happens.

It is a real problem because most can't live on what they would receive from their group plan once a claim is fully adjudicated.

it no longer matters in my case but i have two low quality group policies:

trashy group policy from residency $5000

presumably trashy group policy from current hospital $10,000

say i'm totally disabled and was making $30k per month and get full SSDI of $4000 including family benefits

how much would i likely get from each policy?

[Tim]

One thing for OP to be on the lookout for is clawbacks from group LTDI policies.

Rarely are payments started at the same time. One sequence is:
STDI
LTDI
then SSDI.
SSDI back dates the claim and you get a lump sum to catch you up to date. Yes, that LTDI company will that was so slow and deliberate will switch gears and go into a feeding frenzy. They want that lump sum payment from SSDI and every dime. That friendly assistance they provided in getting SSDI was for their benefit, not the policy holder.
Oh yes, if they were taxable, you still owe them gross but it is a mess trying to recover the taxes.

It’s not just the monthly benefit that is a surprise. but the retroactive application is a mess. The headaches may pile up in addition to your disappointment.

[Scott at MD Financial Services]

it no longer matters in my case but i have two low quality group policies:

trashy group policy from residency $5000

presumably trashy group policy from current hospital $10,000

say i'm totally disabled and was making $30k per month and get full SSDI of $4000 including family benefits

how much would i likely get from each policy?

Depending on the group policies they may even offset for each other. I would read the employer provided plan as it very well could have a provision that is offsetting for other group plans, if so and you were to become totally disabled then it could be reduced from $10k to $5k so you would then have a $5k and $5k payout. Once that is settled if they both have offsets for the SSDI then usually it is proportional offset to the benefit to be paid. I could easily see you getting $3k from each group policy and $4k from SSDI for a total of $10k. Maybe Ethan will chime in on what he sees at claim time.

[Kamban]

Depending on the group policies they may even offset for each other. I would read the employer provided plan as it very well could have a provision that is offsetting for other group plans, if so and you were to become totally disabled then it could be reduced from $10k to $5k so you would then have a $5k and $5k payout. Once that is settled if they both have offsets for the SSDI then usually it is proportional offset to the benefit to be paid. I could easily see you getting $3k from each group policy and $4k from SSDI for a total of $10k. Maybe Ethan will chime in on what he sees at claim time.

In other words, that $15K in expected income per month from disability insurance has been reduced to 6K.

[Tim]

In other words, that $15K n expected income per month from disability insurance has been reduced to 6K.

And each will withhold payment to recover that clawback of any lump sum SSDI unless you write a check to make the LTDI companies “whole”.
And the. attempt to make a come back……it can get nasty.
There is a reason group policies are cheap, money.

[dayman]

Just want to say I really appreciate the input from the experts on this thread. I learned something. I am going to piggyback with a question.

I have an individual own occ policy for 10k/mo, and a group policy for 15k/mo. If I am disabled long term, presumably I'd be eligible for SSDI - let's assume 4k/mo.

Assumptions based on this thread - I'd receive the 4k in SSDI, the full 10K from my individual policy, but then only an extra 1k from group policy? So max 15k. Is any of that taxed? (both my individual and group policies are paid with after tax money)

If I were to drop my individual policy - if fully disabled, I still wind up with 15k / mo between SSDI and my group policy, right? What are the risks of doing this - group policy more likely to deny payout in the first place?

[FIREshrink]

Depending on the group policies they may even offset for each other. I would read the employer provided plan as it very well could have a provision that is offsetting for other group plans, if so and you were to become totally disabled then it could be reduced from $10k to $5k so you would then have a $5k and $5k payout. Once that is settled if they both have offsets for the SSDI then usually it is proportional offset to the benefit to be paid. I could easily see you getting $3k from each group policy and $4k from SSDI for a total of $10k. Maybe Ethan will chime in on what he sees at claim time.

thank you that is more or less what i always expected with these policies - that I would be capped at $10k. Fortunately we never had to use before reaching FI.

[Tim]

Just want to say I really appreciate the input from the experts on this thread. I learned something. I am going to piggyback with a question.

I have an individual own occ policy for 10k/mo, and a group policy for 15k/mo. If I am disabled long term, presumably I'd be eligible for SSDI - let's assume 4k/mo.

Assumptions based on this thread - I'd receive the 4k in SSDI, the full 10K from my individual policy, but then only an extra 1k from group policy? So max 15k. Is any of that taxed? (both my individual and group policies are paid with after tax money)

If I were to drop my individual policy - if fully disabled, I still wind up with 15k / mo between SSDI and my group policy, right? What are the risks of doing this - group policy more likely to deny payout in the first place?

Tax:
”The IRS states that your SSDI benefits may become taxable when one-half of your benefits, plus all other income, exceeds an income threshold based on your tax filing status: Single, head of household, qualifying widow(er), and married filing separately (did not live with spouse) taxpayers: $25,000.”

The definitions and qualifications in a group policy are likely substantially different.
The length of disability and requirements to seek some type of income can be substantially more aggressive.
The “experts” are the independent insurance agents. They can review your group policy and personal policy.
I encourage you to find out exactly what LTDI you have.