What is a long-term disability social benefits offset rider?

With this rider, any benefits you receive from SSDI will be used to offset the benefits you receive from your private long-term disability insurance coverage.

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You can sometimes receive lower premium rates on your long-term disability insurance coverage by adding a social benefits offset rider to your policy. With this rider, you’ll pay lower premiums for your coverage, but you’ll have to apply for Social Security disability insurance (SSDI) if you become disabled, and any benefits you receive from SSDI will be used to offset the benefits you receive from your private disability insurance coverage.

Some long-term disability insurance companies require you to have the social benefits offset rider, or even have it written into the base policy itself. These provisions may be variously called the social insurance supplement (SIS) rider or the social insurance benefit rider.

What are Social Security disability insurance benefits?

If you can’t afford commercial long-term disability insurance (LTDI), you may be eligible for Social Security disability insurance. Administered by the Social Security Administration, SSDI provides monthly benefits much like LTDI. As with other socialized benefits programs, you don’t have to pay anything for these benefits because they are already paid for with tax dollars, but the benefits may be lower than private disability insurance.

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However, the application process is very lengthy, and almost two-thirds of people get rejected because their disability isn’t severe enough. As with private LTDI, SSDI has a definition of disability that you have to meet to qualify for benefits, but SSDI’s definition of disability is a lot stricter than that of most LTDI plans, which is why we don't recommend that you use it as your primary form of disability insurance.

How does the social benefits offset rider work?

You have the option to apply for SSDI benefits even if your LTDI policy pays you the full benefits amount. But if your policy has the social insurance supplement rider, you’re required to apply for SSDI benefits at the same time you file a claim for LTDI benefits.

If your SSDI application is approved, your commercial disability insurance carrier will reduce how much it pays you each month by the amount you’re receiving from the Social Security Administration (SSA). For that reason, policies that come with the SIS rider are often more cost-effective than those that don’t; the rider lowers the disability insurance company’s obligation to you.

Although this sounds like a raw deal, the social benefits offset rider may help keep your premiums low. And if you get rejected for SSDI benefits, which is likely, the disability insurance company still has to pay you the full amount of coverage you purchased, although it may also force you to appeal the SSA’s rejection.

Example of the social benefits offset rider in practice

You’re looking for an LTDI policy to cover your $60,000 annual income. You estimate that you’ll need to replace $36,000 — 60% — of your income while you’re disabled, which works out to a $3,000 monthly benefit. However, because of your health problems, the LTDI policy you’re looking at it is prohibitively expensive.

Your agent tells you that you can save money by agreeing to a social insurance benefit rider. The insurer assumes you’ll be getting around $1,000 per month from SSDI, which means they would only have to give you $2,000 per month to leave you fully covered. In return, you save a decent chunk of change on your monthly premiums.

Years later, you experience a disability that completely stops you from working. You apply for SSDI at the same time you file a claim for long-term disability insurance benefits. Unfortunately, your initial SSDI application is declined. Your insurer starts paying you $3,000 per month under the condition that you appeal the decision. They may even pay for a lawyer to help you appeal.

After this, two things can happen to you. You either lose the appeal and the insurer continues to pay you $3,000 per month, or you win the appeal and SSDI starts giving you $1,000 per month and your insurer reduces your benefits to $2,000 per month. In both cases, you continue to receive $3,000 per month.