Chapter 6: Calculation of Benefit Issues
Calculation of Benefit
With a private disability policy, the calculation of the monthly benefit may not be necessary. The benefit may be for a set amount such as for example, $15,000 per month. However, there may be increases along the way, if there is a provision for cost-of-living adjustments linked to the consumer price index. It is important to review policy terms as to consumer price index increases, especially in times of inflation. There also can be offsets for other income or benefits being received that reduces the policy benefit.
Group policies typically are based on a percentage of your monthly salary, rather than a set amount. Many policies look at your income before disability, then ascertain the percentage of that income for which you are insured, which often is found in the schedule of benefits. Then your policy benefit will be reduced by other income that is noted in the policy, or other benefits such as a Social Security disability benefit. Last of all, it is important to look at the maximum and minimum benefit provisions. If all of the offsets reduce your benefit to zero or a negative number, it is possible that the minimum benefit will still require that something be paid.
There is a danger that arises with the calculation, and that is the insurance company's failure to allow the claimant to challenge the decision if the calculation is wrong. Every disability benefit claim will involve the issue of whether you are disabled or not, and then also the issue of the amount of the benefit that is due to be paid. This decision should be made all at one time, but sometimes it is separated out and the insurance company will fail to inform you that any decision regarding the calculation of the benefit can be challenged. That leaves the claimant frustrated as to what can be done.
It is also unfair and burdensome for the disability decision and then the calculation decision to be separate decisions. For example, if you were found not disabled under the policy definition and you challenge that, if the decision is reversed, the insurance company will then refer the file back to the original claims adjuster to calculate the benefit. If the calculation is wrong, you may be forced by the insurer to challenge that separately taking it through an appeal process all over again. That can result in an extended delay in receiving the right amount of your benefit if the process is bifurcated or separated out. This is typically improper.
Other Income
Other income benefits is typically a defined term in a disability policy. The term refers to monies you receive and are used to reduce your monthly benefit. Many insureds are shocked to see that a benefit which was supposed to pay $7,500 per month is reduced by monies withdrawn from a 401(k) to survive while waiting on a disability decision. Further, if Social Security disability benefits are received, which may be required by the policy, that reduces the benefit further. Insureds begin to wonder what exactly they were paying for when purchasing the disability policy.
Policies vary greatly, as do the benefits that are used to offset the policy benefit. It is therefore important to purchase a disability policy that only has the other income benefits that you desire to see offset your disability benefit. There is more latitude seen with private policies.
Most group disability policies, have an offset for Social Security disability. Most insureds would understand that to mean the amount of the Social Security benefit the insured is directly receiving. However, often that offset includes amounts that minor children or a spouse receive because of the insured's disability.
For example, if a Social Security disability benefit is $3,000 per month, the insured's minor child or children may be entitled to receive approximately $1,500 per month as well. It can make a significant financial impact on the long-term disability benefit to be reduced by $4,500 per month. That of course will only continue for as long as the child or youngest child receives that benefit. Nonetheless, it can be quite a shock and create financial hardship.
Some insureds may claim the retirement benefit early, while waiting for the disability benefit to pay. Early retirement may be offset. If it was realized that the benefit would reduce the disability benefit, that decision might not have been made. Look over your policy before you take that step.
Here is an example of an “other income” benefit provision:
An employee for whom disability benefits are payable under this policy may be eligible for benefits from other income benefits. If so, the insurance company may reduce the disability benefit by the amount of such other income benefits. Other income benefits include:
1. Any Social Security disability and retirement benefits the employee receives or is assumed to receive on his or her own behalf or for his or her dependents.
2. Any retirement plan benefit funded by the employer.
3. Any benefit from another disability policy.
4. Any amounts received (or assumed to be received) by the Employee from a third party for sickness or injury that serves as a basis for the disability claim. This includes any damages, compromises or settlement paid in place of such benefits, whether or not liability is admitted.
The list can be lengthy as to what is “other income.” Knowing the benefits on the list should drive decisions made. For example, if you withdraw all of your 401(k) benefit and that constitutes an other income benefit offset, it may be wiser to either postpone doing that or take it out over time in smaller increments.
The usual point of the other income benefit provision is to make certain that it is not profitable for an insured to claim disability. If someone has restrictions and limitations, but it is a close call as to whether they can suffer through the pain and difficulties to work or not, the insured's realization that he will make more not working might lead to a disability claim according to insurance companies. However, the offsets can go too far and make one wonder as to the value of disability insurance when the benefit is reduced to very little. It is important to look at the offsets at the time that you obtain the policy.
Lump Sum of Other Income
This term pertains to receiving a sum of “other income” money in one payment, but under circumstances where it is for more than one month. For example, on a Social Security disability claim, the process may take one and a half or two years before receipt of a disability benefit. When a favorable finding is made, the Social Security Administration will pay back benefits for many of the months which have passed since disability started. That will be paid with a lump sum of money.
In that situation, the question arises as to whether the offset should just be for the month in which you received the other income benefit, or whether it should be spread out over all of the past months for which the benefit was due to be paid. Insurance companies certainly do not want to simply take the offset over one month, and so there generally is a rule in the policy spreading that lump sum out over the number of months for which the payment is made, or if that is not specified spreading it out over 60 months.
Here is an example of a policy provision with a Lump Sum of Other Income rule:
Lump sum payments of other income are offset over the equivalent monthly rate stated in the award. If no monthly rate is given, we prorate the lump sum over the lesser of 60 months or the expected remaining number of months for which you would be entitled to benefits from this disability policy.
The Social Security Administration makes clear in its notification letters, the number of months for which the lump sum of money is being paid. Therefore, the insurance company will retroactively offset the benefits that have been paid using the information from the Social Security Administration.
The more difficult situation arises with a lump sum worker's compensation settlement or a withdrawal from a 401(k) that constitutes an offset. If there is no specification as to the months at stake with that settlement or withdrawal, then the insurance company may offset those monies over 60 months or some other time frame noted in the policy. There is obviously some financial planning that should be taken into account before making a decision to obtain other income monies in a lump sum.
Disability Earnings
Disability earnings are monthly income which you earned from working while you are disabled. It can include all salaries, wages, commissions, bonuses, or any other compensation earned while working. If you owned the business which employed you, it also may include business profits attributable to you.
Here is an example of the disability earnings definition:
Any wage or salary for any work performed for any employer during the employee's disability, including commissions, bonuses, overtime pay, or other extra compensation.
In many policies, disability earnings are used to reduce the monthly benefit received. To provide incentive for the insured's return-to-work attempt, there is often a provision which allows the insured to make up to 100% of what was being made before disability for a certain time. The insurance company combines the disability earnings with the benefit, and if it is 100% or less of earnings before disability, there is no offset or reduction.
For example, if an insured was making $10,000 per month and the disability benefit received was $6,000 per month, disability earnings of $4,000 per month without an offset or reduction may be allowed. This type of policy provision is clearly intended to encourage a return to work. If the disability earnings are offset entirely from the disability benefit, then one would only receive a benefit of $2,000 each month. Obviously, there is no financial incentive to work if that is how disability earnings are applied.
A danger can arise here. If the definition of disability earnings applies to earnings received during disability, but the work was performed before disability, that can be unfair. Doctors, lawyers, and sales or commission-based occupations, involve receipt of income long after the work performed. One must look carefully at this definition. Offsetting those earnings during disability can have a devastating financial impact and might even be asserted by the insurer as a reason to disqualify from disability altogether if the earnings are significant enough. A gap in coverage might also be asserted by the insurance company, which it contends ends the right to assert a claim. Obtain counsel right away if this issue is a concern.
Social Security Assistance
Because Social Security disability benefits are typically offset with nearly all group disability policies and even a few private policies, insurance companies are very much interested in seeing their insureds obtain those benefits so they can reduce what they are required to pay out. Accordingly, some have entered into relationships with vendors who will provide representation for Social Security disability claims. This could potentially involve a conflict of interest.
For example, that conflict could exist if the vendor is actually advancing the interests of the insurance company rather than the claimant. Some vendors assist in securing retroactive Social Security disability benefits to make sure past benefits are turned over to the insurance company pursuant to offset provisions in the policy. This can be unfair; however, a claimant cannot rely on state bar organizations to regulate that representation of non-lawyers. Under Social Security rules, a non-attorney advocate may qualify to serve as a representative. Non-attorneys are not governed by the rules of ethics that govern attorneys with state bars. That can create conflict problems more readily.
Sometimes the policy will state that if you use the insurer's recommended or offered Social Security attorney or advocate, amounts paid toward the fees of the advocate or attorney out of the back benefits you will receive will not be used to reduce the amount of your long-term disability benefit. That means that if you use your own Social Security disability attorney or advocate, the fee that is paid to the advocate or attorney out of your Social Security disability monies, may still be offset by the insurance company against your long-term disability benefit. That is hardly fair to see monies offset that you did not receive, nor is it fair to force you to use the insurance company's advocate or counsel. This policy language is used to pressure claimants. This gives the insurer greater confidence that it will receive back overpaid disability benefit amounts.
Here is an example of the Social Security assistance provision that is more fair:
ASSISTANCE WITH FILING FOR SOCIAL SECURITY DISABILITY BENEFITS
Our company can arrange for advice regarding Your claim for Social Security disability benefits and assist You with Your application or appeal. In order to be eligible for assistance, You must be receiving Monthly Benefits from Us.
We can arrange assistance in obtaining Social Security disability benefits by:
a) helping You find appropriate representation;
b) obtaining medical and vocational evidence; and
c) reimbursing pre-approved case management expense.
Some claimants are under the mistaken impression that if the insurance company advocate is used, the insurance company will act fairly and continue to pay the claim. That is a false assumption which has hurt thousands of claimants. Frequently, after an award of Social Security benefits, this is the time when an insurance company will terminate a disability benefit.
Some insurance companies will wait until the return of the overpaid benefits, and then follow that with a claim termination. While there may be a contractual obligation to repay overpaid benefits, there is also a contractual obligation for the insurer to act in good faith and fairly as to the claim. This strategy is common and raises concerns over repaying benefits. If an insured has been found to be unable to perform substantial gainful employment by the Social Security Administration, that should not be ignored and a genuine reason to disregard that finding asserted.
Subrogation and Right of Recovery
Subrogation in the disability insurance context usually refers to the insurance company having a right to receive back money which it paid to their insured from a third party. For example, a professor is hurt in an automobile accident that was not her fault. She cannot work now due to permanent disabling injuries and files a long-term disability claim. That benefit is paid and in the meantime she pursues a claim against the person who was negligent in causing the automobile accident. When she obtains a recovery for that injury, that long-term disability insurer may contend that it is subrogated to those rights of recovery and is entitled to receive back benefits it paid since the accident recovery may include lost wages.
Many times, such terms in the policy also provide that the subrogation and recovery rights have a first priority, meaning that even though the recovery might not be enough to cover the total of out-of-pocket medical bills, lost wages, and pain and suffering, it still has the right to priority of first payment out of that recovery. This example is not far-fetched and happens often. The level of liability insurance required in many states is not sufficient to compensate an injured party for all losses that have occurred in an accident. Many people fail to obtain a reasonable level of underinsured or uninsured motorist coverage and thus, persons harmed in an accident may end up in this scenario.
This subrogation and right of recovery provision, when enforced, is repulsive to most insureds since the insured is the one who has suffered pain, permanent injury, and will have ongoing medical issues. The insured is the one who paid the premium for the long-term disability coverage or worked for that benefit as part of an employment package. Yet the insured is also the one who is left in a difficult position, usually through no fault of their own.
Here is an example of a portion of provisions from a policy relating to this subject:
Subrogation: when this certificate pays a benefit, we will immediately be subrogated to your rights of recovery from any third party to the full extent of benefits paid.
Recovery: if you receive a payment from any third party or insurance coverage due to an injury, sickness or condition, we have the right to recover from and be repaid by you for all amounts this certificate has paid due to that injury, sickness or condition up to and including the full amount you receive from any third party or insurance coverage. We have a first priority claim and are entitled to full repayment on a first dollar basis from any third party payments, even if such payment to the company will result in a recovery to you, which is not sufficient to make you whole or compensate you for all of the damages you have sustained. We are entitled to recover from any and all settlements or judgments even if those are designated as pain-and-suffering or non-economic damages only.
You should obtain counsel right away when this issue arises to make sure you are treated fairly.
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