Cost & Coverage
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When you become disabled and can no longer work and earn an income, your disability insurance makes a payment to you each month during your benefit period or until you recover from the disability. In virtually every case, you’ll never have to pay even a penny of your disability insurance benefits.
However, in some cases, you may have to pay back disability payouts. These cases are related to when you receive both disability insurance benefits from a private insurer, like long-term disability insurance, and Social Security disability insurance (SSDI) benefits, which are administered by the U.S. Social Security Administration.
You’re legally allowed to receive benefits both from a private insurer and SSDI, but in most cases the amount you receive in SSDI will be deducted from the amount the disability insurance company owes you. You may be required to pay back the disability insurance company for any amount it pays you in excess of its obligation.
If you are caught committing disability insurance fraud, you’ll have to pay a massive fine and could face prison time, in addition to the more obvious consequences of having your insurance benefits and policy canceled.
Read on to learn about the times when you have to pay back disability insurance benefits:
Most long-term disability insurance (LTDI) policies contain a rule, called the offset provision, that forces you to apply for SSDI in addition to claiming LTDI benefits. If your LTDI policy has this provision and you receive SSDI payments, your LTDI benefits will be reduced by the amount you received in SSDI.
The Social Security Administration’s definition of disability, which describes how disabled you have to be before you’re eligible to receive benefits, is very strict, and most people get denied. In addition, it may take months or years to start receiving SSDI benefits. However, if you’re granted benefits, you’ll receive a lump-sum catch-up payment for every month the SSA spent processing your eligibility.
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During the time you spent waiting for SSDI benefits, your LTDI benefits may have already started paying out. If your LTDI policy has the offset provision, you may have to pay all or part of the catch-up payment to the insurance company to offset the amount the company was obliged to pay you during that time.
Say you pay premiums for a disability insurance policy worth $5,000 per month in benefits once you become disabled. Your policy has the offset provision, so you have to apply for SSDI as well. SSDI is free to you – it’s a tiny tax that everybody pays – so you should apply anyway.
But say you become disabled on March 1. Your LTDI policy has a three-month waiting period, also known as an elimination period, so you become eligible to receive LTDI benefits from the insurance company on June 1. You receive your first payout of $5,000 on July 1.
Meanwhile, your SSDI claim is still processing. It finally becomes approved later that year, for SSDI benefits of $1,000 per month. (SSDI has much lower benefits on average than commercial insurance.) You receive a catch-up payout for each month you should’ve been receiving SSDI payments.
If your catch-up payment is three months’ worth ($3,000) and you’ve been receiving long-term disability insurance benefits for two months, you only owe the offset for those two months: $2,000. But, in this example, if you’ve been receiving LTDI benefits for three or more months, you’ll have to give the whole catch-up payment to the disability insurance company.
Additionally, once your SSDI benefits kick in, your LTDI benefits will be offset for every month. Now you receive $4,000 from the disability insurance company and $1,000 from the government.
You’ll also have to pay taxes on the SSDI benefits, reducing your overall benefits even further. (LTDI benefits are not taxed if you paid for them with after-tax income.) Prior to 2018, you could deduct the offset payment from your taxes, but this is no longer possible due to the major overhaul of U.S. tax law at the end of 2017. The Tax Cuts and Jobs Act removed all the miscellaneous deductions you could claim on your Schedule A.
Note that it may be possible to avoid the long-term disability insurance offset rider by asking your disability insurance carrier. You may have to pay higher premiums, since this increases the burden on the company.
If you receive SSDI, there is a possibility that you’ll have to pay back your benefits to the government. When this happens, it’s because an overpayment occurred. Essentially, either the SSA was paying you too much for your particular disability, or you started earning so much money that you lost your eligibility for benefits but didn’t alert the government.
In order to avoid having to payback a Social Security disability payment, you should alert the SSA if you recover in whole or in part from your disability. The SSA allows you to earn up to $1,180 per month ($1,970 if you’re blind) and still be eligible for benefits. If you earn more than that, your benefits become an overpayment that you’ll be required by law to pay back.
If you’re told you’ve been receiving too much in SSDI benefits, you can always appeal the decision and prove that you’re still eligible for the original payout amount. Successful appeals may hinge on how the overpayment occurred and how much of a financial burden it would be to repay the overpayment.
When you’re asked by the SSA to repay an overpayment, you’re sometimes required to pay a very large amount of money. In this case, you can often negotiate a payment plan that amounts to a certain percentage of your income each month.
As with long-term disability insurance, if you keep receiving Social Security disability benefits despite being able-bodied, you could be fined or face prison time.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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