The Devil Is In the Details: Long Term Disability Policies and Benefit Offsets
In a previous post, we discussed a feature of long-term disability insurance policies that is easily overlooked and frequently leaves policyholders feeling cheated and deceived by their insurer: the benefit offset provision. When a person signs up for a disability insurance policy, he or she expects to pay a certain premium in exchange for the assurance that the insurance company will provide the agreed-upon monthly benefit listed in the policy, should they ever become disabled. What many people do not realize is that some disability insurance policies contain language that permits the insurer to reduce the amount of monthly disability benefits it is required to pay if the policyholder receives other benefits from another source.
Worker’s compensation, supplementary disability insurance policies, state disability benefits, and social security are some of the most common “other sources” from which policyholders may unexpectedly find their disability insurance benefits subject to an offset. The frequency of offset provisions varies by policy type. They are more likely to appear in group policies and employer-sponsored ERISA policies, and are rarely found in individual disability insurance policies.
Benefit offset provisions can have significant and often unforeseen financial repercussions, as illustrated by the recent account of a couple from Fremont, Nebraska. As reported by WOWT Channel 6 News, Mike Rydel and his wife Carla were receiving monthly benefits under Mr. Rydel’s disability insurance policy with Cigna. Mr. Rydel had suffered a stroke in the fall of 2015 that had left him incapacitated and unable to work. The Rydels’ financial situation was made even more dire by Mr. Rydel’s need for 24-hour care, which prevented Mrs. Rydel from working as well.
In an effort to supplement his family’s income, Mr. Rydel applied for Social Security disability benefits. When his claim was approved, the Rydels expected a much needed boost to their monthly income. Unfortunately, due to an offset provision in Mr. Rydel’s policy, his monthly disability benefits under the Cigna policy were reduced as a result of the approved Social Security claim, and his family did not realize any increase in income.
The Rydels were understandably shocked when they were informed by Cigna that Mr. Rydel’s monthly disability insurance benefits would be reduced by the amount he was now receiving from Social Security, and that Cigna would be pocketing the difference. Perversely, the only party that benefited from Mr. Rydel’s SSDI benefits was Cigna, which was off the hook for a portion of Mr. Rydel’s monthly benefits. In response to an inquiry from WOWT, Cigna simply asserted that “coordination” of private insurance benefits and government benefits was a long-standing practice – an assurance that likely provided no solace to the Rydels.
The Rydels’ story highlights the importance of carefully reviewing every aspect of your disability insurance policy before signing. Benefit offsets, policy riders, occupational definitions, and appropriate care standards in your policy can significantly impact your ability to collect full benefits if you become disabled. You should review your disability insurance policy carefully to determine if it contains any offset provisions that may affect your benefits. If it does, you will need to take them into account when estimating your monthly benefits.