There are two main ways that you can get an income replacement in the event that you can no longer work due to a disability. One of them — the Social Security Disability Insurance (SSDI) program — is federally run and hard to qualify for. That’s why financial experts usually suggest purchasing a private long-term disability (LTD) insurance policy.
Unlike SSDI, you apply for LTD before you (potentially) experience a disability. Typical healthy men and women in their twenties can usually get pretty cheap LTD. However, if you wait to apply until you get older, or if you have a serious chronic condition or work in a dangerous field, LTD can be prohibitively expensive.
There are a lot of ways you can reduce the cost of long-term disability insurance, and one of them is to take advantage of SSDI benefits to lower the amount of private coverage you need to buy. Of course, there’s no guarantee that you will get SSDI benefits — it’s estimated that only 56% of applicants are approved, and about a fifth of those go through a lengthy appeals process that can last up to two years.
So there’s the essential dilemma: you want to buy less private coverage because you think you can get SSDI, but you don’t want to rely on SSDI in case you don’t get approved. Enter the Social Benefits Offset rider. Sometimes called Social Security Offset riders or Social Insurance Offset riders, this rider solves the above dilemma by giving you private coverage both while you apply for SSDI benefits and if you don’t receive SSDI benefits. If you do receive SSDI benefits, your private insurer will subtract your SSDI benefits from your private benefits. At the end of the day, you’ll be receiving the same amount of money, but part of it will be from the federal government.
Let’s explain that through a potential scenario using a few made up numbers. Gary is looking for an LTD policy to cover his $60,000 annual income. He estimates that he’ll need $36,000 — 60% — of his income while he’s disabled, which works out to a $3,000 monthly benefit. However, because of Gary’s health problems, the LTD policy he’s looking at it is prohibitively expensive. His agent tells him that he can save money by agreeing to a Social Security Offset rider. The insurer assumes that he’ll be getting around $1,000 per month from SSDI, which means they would only have to give Gary $2,000 per month to leave him fully covered. In return, he saves a decent chunk of change on his monthly premiums.
Years later, Gary experiences a disability that completely stops him from working. Gary applies for SSDI while waiting for his LTD policy to kick in (in his case, three months). Unfortunately, his initial application is declined. His insurer starts paying him $3,000 per month under the condition that he appeals the decision. They even pay for a lawyer to help him appeal.
After this, two things can happen to Gary. Either he loses the appeal and the insurer continues to pay him $3,000 per month, or he wins the appeal and SSDI starts giving him $1,000 per month and his insurer reduces his benefits to $2,000 per month. In either case, Gary continues to bring in $3,000 per month.
What happens if you don’t have a Social Security Offset rider but you still apply for and receive SSDI benefits? In most cases, you can keep both. However, if you’ve purchased LTD through your employer, your policy may have a Social Security Offset rider built-in. Check with your HR department for further details.
Image: Kat Grigg