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A Consumer’s Guide to...
A Publication of the Maine Bureau of Insurance
Paul R. LePage Eric A. Cioppa
Disability insurance provides you with a portion of your income if an injury or illness prevents you from working. The purpose of disability insurance is to provide benefits sufficient to meet daily expenses, while not being large enough to discourage an insured from returning to work. Benefits may be calculated as a percentage of your pre-disability income or as a flat dollar amount for events such as injury, surgery, or maternity leave. You may have short-term and/or long-term disability insurance through your employer, although many people also choose to purchase individual disability insurance on their own.
Disability policies vary in their benefits and exclusions; the best way to understand your coverage is to read your policy.
The definition of disability will depend upon your contract with the insurance company. Some policies consider you disabled when you are unable to perform the duties of your own occupation ("own occ"), while others pay only if you are unable to perform any job for which you are suitable based on your training, education, and experience ("any occ"). A policy may include a definition of disability that changes over time. For example: your disability policy may provide benefits if you are unable to perform the substantial and material duties of your regular occupation (own occ), but, after two years, the definition will change to an any occ. This means that after two years, your inability to perform your own, regular occupation will no longer qualify you for benefits; you must be unable to perform the duties for any occupation for which you are suitable based on your training, education, and experience. An own occ definition of disability is tied to the performance of your own occupation; however, the insurance company will likely look at the duties associated with your occupation in the national economy (i.e., not the specific duties you have with your employer). Some policies require that you not be gainfully employed while you are collecting benefits or that you are unable to earn a certain percentage of your pre-disability income because of injury or sickness.
SHORT-TERM & LONG-TERM DISABILITY
Short-term disability (STD) coverage generally provides a specified percentage of pre-disability income (e.g., 60%). The duration of STD coverage varies, but is typically not longer than six months. STD may fill in the elimination period before long-term disability benefits begin.
Typical group long-term disability (LTD) benefits start when short-term benefits are exhausted. Benefits may continue anywhere from five years to the remainder of an individual’s life. LTD insurance is generally considered protection against a catastrophic illness or injury, but many long-term disability claims result from common medical conditions that cause an increasing level of impairment over time. It is important to check a policy’s maximum benefit period.
As previously discussed, a disability policy may apply an own occ definition of disability for a two year period and then change to an any occ definition. Some policies limit benefit periods for specific types of conditions, such as “mental/nervous disorders” or disabilities based on self-reported symptoms (those not supported by medical testing). A common limitation of the benefit period is 24 months for disability arising out of mental nervous disorders (e.g., major depressive disorder).
PRE-EXISTING CONDITIONS & EXCLUSIONS
A pre-existing condition is a medical condition that you were treated for before you obtained insurance. The exact definition will depend upon your policy’s language. Disability due to a pre-existing condition may be excluded for a period of time, depending upon the language in your policy. The policy may contain “look back” (usually six months to a year) and “look forward” (usually one year) provisions which establish the pre-existing condition exclusion time frame. For example, if you receive medical treatment for a heart condition within six months of the effective date of your disability policy (the look back period) and, during the first year that the policy is in-force, you suffer a disability related to your heart condition, benefits will be denied as a pre-existing condition.
An exclusion is a condition or type of injury that is expressly not covered under your policy. If your policy was individually underwritten, it is possible that certain types of sickness could be excluded due to your medical history. Unlike a pre-existing condition, a disability related to a condition that is excluded will never be covered under that policy.
OTHER SOURCES OF INCOME: OFFSETS
If you arereceiving income from alternate sources, this is likely to reduce the amount of your disability payments through “offset” (also known as “integration”). Workers’ compensation, Social Security benefits, other insurance, and retirement plan benefits are among the other income sources that may reduce your benefits under your disability insurance policy.
In the event that a determination of benefits under another source of income has not been made, the insurance company may offer to reduce your benefits by the estimated amount they think you will receive. They may also provide you with the option of receiving your full disability amount subject to an obligation of returning any overpayments. If you elect the latter option, be aware that the amount you are responsible for repaying could be significant and may reduce future benefit payments.
Offset provisions will vary by contract, so it is important to review your policy.
If your employer pays the premiums for your disability insurance, your benefits are taxable to you; however, under current tax laws, your disability benefits are not taxed if you pay the premiums. If you and your employer share the cost of your disability premiums, the portion paid by your employer is taxed. For assistance with specific tax questions, please consult with a tax advisor.
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