In previous posts, we’ve discussed how insurance companies typically place caps on how much coverage a policyholder can receive. For physicians and dentists, this typically results in monthly disability benefit amounts that are lower (and sometimes much lower) than the monthly income you would bring in if you were still able to practice.
In some cases, policyholders are able to supplement their income by working in another field, but this is only possible if your policy allows you to work in another occupation. Alternatively, your policy could contain a “no work” provision, which would foreclose this as an option. And some newer policies even require you to be working in order to collect benefits, so you don’t have a choice–you must find another job if you want to receive your disability benefits each month.
If you are not able to work in another occupation, due to the nature of your disabling condition and/or the contractual terms of your policy, you may be placed in a position where you must either cut expenses, find another source of income, or both. If you find yourself in this unenviable position, or you are planning ahead and contemplating what you might do in this sort of situation, you will want to keep in mind that some policies–particularly employer-sponsored plans–can contain offset provisions, which allow the insurance company to reduce your monthly benefit if you receive additional income from certain enumerated sources.
What Types of “Other Income” Can Be Offset?
There are many types of income that your insurer might include in an offset provision. Some examples include:
- Social Security benefits;
- Pension plans;
- Sick leave or a salary continuation plan of an employer;
- Income from other disability insurance policies;
- Retirement benefits funded by an employer;
- Workers’ compensation;
- Partnership or shareholder distributions; or
- Amounts paid because of loss of earning capacity through settlement, judgment, or arbitration.
The list above is by no means exhaustive and, again, you should carefully review your policy for its specific list of offsets.
What are Overpayment Provisions?
If your policy contains an offset provision, it will also likely contain an overpayment provision. In most instances, if your policy contains an offset provision, your insurer will be able collect information about your income from other sources prior to issuing the benefit, and calculate the amount due accordingly. However, in some cases this is not possible.
For example, say you applied for Social Security disability benefits. In some cases, it can take several years before a Social Security determination is made. Then, at that point, if your claim was approved, you would receive a lump sum of benefits covering the time period from the date of disability you reported to the date your claim was approved.
This is where the overpayment provision kicks in. If your policy has an overpayment provision, upon learning of the lump sum payment from Social Security, your insurer could potentially require you to pay the entire lump sum of benefits back to your insurance company (depending on the terms of your policy). This is because the lump sum payment represents several monthly payments you would have received over the relevant time frame. If your insurer paid the full monthly disability benefit for those months and your policy has an offset provision, your insurer will likely ask for the Social Security benefits as payment for the amounts that should have been offset each month over that time period.
What Happens if You Cannot Pay Back the Overpayment in a Lump Sum?
If you are not in a position to pay back an overpayment in a lump sum, your insurer will seek to collect the overpayment amount in other ways. One way is reducing and/or withholding future benefits until the full amount of the overpayment has been recouped by the insurer. Your insurer may also work out a payment plan with you, initiate collection efforts against you and/or file suit to recover the overpayment.
Offset and overpayment provisions can be particularly devastating if you are caught unaware and find yourself with considerably less income than expected, or an obligation to repay a large sum to your insurer. When selecting a policy, you should try and avoid these types of provisions if at all possible. If you already have a policy, you should read it carefully, so that you are fully aware of any offsets that could occur and any overpayments that you could potentially be responsible for under the terms of your policy