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
The Answer Is: It Depends
Whether your disability benefit payments are taxable depends on what type of policy or plan you have and how your premiums are paid. This post is not intended as tax advice—we’ve outlined some basic information below only. You should always speak with a tax professional regarding your particular situation.
Individual Policies: These are policies that you purchase yourself. Generally speaking, if you pay the premiums with after-tax dollars, the benefits you receive are tax free. However, if you pay with pre-tax dollars or deduct your premiums as a business expense, then your benefits will likely be subject to federal income taxation.
Group Policies: Group policies are those offered through associations such as the ADA or AMA. These types of policies offer special terms, conditions, and rates to members and function much like individual policies, with similar tax consequences. Generally speaking, if you pay the premiums (with after-tax dollars) then the benefits you receive are tax free.
Employer-Sponsored Policies: These types of policies can be less straightforward when it comes to taxes, as the payment of premiums can be structured several ways. According to the IRS website:
- If your employer pays the premium and does not include the cost of the premiums in your gross income, then benefits you receive will generally be fully taxable.
- If the employer only offers a policy, but you pay the entire premium without taking a tax deduction,
then the benefits you receive will generally be tax-free.
- If both your employer and you pay the premiums then the tax liability will generally be split.
If you are unsure what type of policy or plan you have, and you think your employer might be paying the premiums, you can look at your application (there is typically a portion that states who is responsible for the premiums) or talk to your HR department. For more information, talk to your accountant. You can also go to to the IRS website on disability insurance proceeds to find additional information.
It may be tempting to save money by enrolling only in a plan solely paid for by your employer, paying premiums with pre-tax dollars, or deducting premiums as business expenses. But keep in mind that, if you do become disabled, the amount of your benefits actually available to you will substantially decrease if you are required to pay income tax on them.
Selecting a policy is an important decision, and how benefits will be taxed is a significant factor to consider. With statistics showing that one in four dentists will be disabled long enough to collect benefits at some point in their careers, choosing to save now could hurt you financially down the road.
Great-West Life & Annuity Insurance Company (“Great-West”) is the final disability insurance provider we will look at in our series profiling insurance companies that specifically market to physicians and dentists.
Great-West, which also goes by the registered mark of “Great-West Financial,” was incorporated in 1907, and traces its roots to a Canadian parent company that was incorporated in 1891. Due to the nature of the economy and other factors, many insurance companies have suffered substantial losses in the past few years, and Great-West is no exception. Great-West’s net income recently dropped from 238.1 million in 2012 to 128.7 million in 2013. Consequently, Great-West may be looking to substantially increase its profits by, for example, denying high paying disability claims.
Company: Great-West Life & Annuity Insurance Company.
Location: Greenwood Village, Colorado.
Associated Entities: Great-West Lifeco Inc.; Great-West Lifeco U.S. Inc.; Great-West Life Assurance Company; Great-West Life & Annuity Insurance Company of New York; Great-West Capital Management, LLC; Great-West Funds, Inc.; GWFS Equities, Inc.
Assets: $55.3 billion in 2013.
Notable Policy Features: Great-West is the insurance company that provides group disability insurance for the American Dental Association (ADA), so if you have a Great-West policy, your claim will probably be governed by the terms of the ADA’s group disability policy.
Great-West frequently sends out notices of updates and changes to the underlying contract between the ADA and Great-West, so there is a chance that you may end up with insurance coverage that you did not bargain for at the point of sale. Oftentimes these notices are full of legalese and insurance jargon, and may be difficult to understand. Nevertheless, it is important for you to promptly review any notices you receive, because they may impact your disability coverage in significant ways. If you receive such a notice and are unsure about what it means, an experienced attorney can explain how the changes outlined in the notice will impact your policy.
Additionally, if you have a Great-West policy, you should be aware that your policy may contain a very strict provision requiring you to obtain proper medical care for your condition. For this reason, if you are thinking about filing a disability claim with Great-West, you should make sure that your medical treatment is both well-documented and “appropriate” under the policy’s terms.
Claims Management Approach: How Great-West administers your claim will depend on the terms of the policy at the time you file your claim. Because the terms of the ADA’s group disability policy are renegotiated on a regular basis, the terms of your policy will likely change over time. Since your initial copy of the policy may no longer be accurate by the time you file your disability claim with Great-West, be sure to ask for a copy of the current version of your policy so that you know your rights under your policy.
These profiles are based on our opinions and experience. Additional source(s): Great-West Financial’s 2013 Annual Report; www.greatwest.com.