Who is entitled to Social Security disability benefits? How is a "disability" determined? How long do payments continue? What happens when you reach retirement age? This Financial Guide provides information you should know about Social Security disability benefits in the event you or a loved one becomes disabled.

Every family needs to plan for the possibility of a disabling illness that prevents a breadwinner from earning income. Here is a summary of the part that Social Security benefits will play in your disability insurance planning—the amount you’re entitled to and the rules that apply. This Guide also informs you of what changes you need to report to Social Security and the easiest ways to report them.

General Information

An individual who is determined by the Social Security Administration to be disabled receives a Certificate of Award. This Certificate explains how much the disability benefit will be and when payments start. It also tells you when you can expect your condition to be reviewed to see if there has been any improvement. If family members are eligible, they will receive a separate notice and a booklet about things they need to know.

Caution: You never have to pay for information or service at Social Security. Some businesses advertise that they can provide name changes, Social Security cards, or earnings statements for a fee. All these services are provided free by Social Security.

Generally, a worker is entitled to disability if he or she (1) is "insured" for disability (i.e., has accumulated sufficient credits in the Social Security system), (2) is under age 65, (3) has been disabled or is expected to be disabled for at least 12 months, (4) has filed an application for benefits, and (5) has completed a five-month waiting period. Disability is generally defined as the inability to perform substantial gainful activity due to a medical or mental impairment. Meeting this definition under Social Security is difficult.

If you are getting disability benefits on your own work record or on a deceased spouse's record, your payments cannot begin before the sixth full month of disability. If the sixth month has passed, your first payment may include some back benefits.

Note: Your Social Security disability benefit may be reduced if you are eligible for workers' compensation, other public disability payments, or a pension from a job where you did not have to pay Social Security taxes (discussed later). You can expect your payment amount to go up in future years. Whenever the cost of living goes up in a year, benefits will be increased by that amount the following January. If there is an increase, you will get a notice telling you about it.

Caution: If a person claiming to be a Social Security employee visits you to talk about Social Security or SSI, ask for identification. A bona fide Social Security employee will be glad to show you proper identification. If you have any doubts, check with SSA. Remember: Social Security employees will never ask you for money to have something done. It is their job to help you.

Taxation Of Benefits

If you get Social Security, you may have to pay taxes on these benefits if you have substantial income. And if you are married and file a separate return, you probably will pay taxes on your benefits.

Benefit Payments

When To Expect Them

Your check should arrive on the third day of every month. If the third falls on a Saturday, Sunday, or legal holiday, you will receive your check on the last banking day before then. The check you receive is the benefit for the previous month. For example, the check you receive dated July 3 is for June.

Form Of Payment

Your benefit can either be mailed to you or deposited directly into your bank account.

Mail. Cash or deposit your check as soon as you receive it. If it is late, wait until three days after it was due and then contact Social Security. If it is determined to be lost or stolen, contact Social Security immediately. Your check can be replaced, but the process takes time.

Tip: Do not sign your check until you are about to cash or deposit it.

If you receive a check you know is not due (for example, you are working and your condition has improved), take it to any Social Security office or return it to the U.S. Treasury Department, Division of Disbursement, at the address on the check envelope. Enclose a note explaining why you are sending the check back.

Direct Deposit. Direct deposit of your check can prevent problems with delayed, lost, or stolen checks. Direct deposit also adds convenience, especially if you are away from home. If you see a deposit in your account for a benefit that you know is not due you, you are, of course, required to refund it.

Most questions about direct deposit can be answered by your financial institution or any Social Security office.

Tip: It is especially important to tell Social Security about any change in your mailing address when you receive your benefits by direct deposit. If you decide to change the account or the financial institution where your benefits are going, it is important to keep the old account open until the first benefit is received in your new account. It usually takes one or two months to process the change from one bank or account to another.

Duration Of Payments

Your disability benefits generally continue for as long as you cannot work and your impairment has not medically improved. They will not necessarily continue indefinitely, however. Because of advances in medical science and rehabilitation techniques, an increasing number of people with disabilities recover from serious accidents and illnesses. Also, many individuals, through determination and effort, overcome serious conditions and return to work in spite of them.

Having A Child After Benefits Start

If you become the parent of a child after you begin receiving Social Security benefits and the child is in your care, be sure to notify SSA so that the child can also receive benefits.

Reaching Retirement Age

If you are still getting disability benefits when you reach full-retirement age (65 or later if born after 1937), your benefits will be automatically changed to retirement benefits, generally in the same amount. You will then receive a new booklet explaining your rights and responsibilities as a retired person. If you are a disabled widow or widower, your benefits will be changed to regular widow or widower benefits (at the same rate) at 60, and you will receive a new instruction booklet that explains the rights and responsibilities for people who get survivors benefits.

Eligibility For Medicare

After you receive disability benefits for 24 months, you will be eligible for Medicare. You will get information about Medicare several months before your coverage starts. (If you have chronic kidney disease requiring regular dialysis or a transplant, you may qualify for Medicare almost immediately.)

Changes That Can Affect Your Benefits

You should promptly report any changes that may affect your disability benefits. Family members receiving benefits also should report events that might affect their checks. The events that must be reported are explained in this section.

If You Change Your Address

You must notify the post office and Social Security immediately if you change your mailing address. In fact, failure to report a change of address is the leading cause of checks not arriving on time. Your report should include your claim number, your old address, and the new address, including the ZIP Code. Give the names of all family members who should receive benefits or information at the new address. Even if you have direct deposit, you should report a new address because important letters from Social Security are sent to your mailing address, not to a bank. Your benefits could be stopped temporarily if Social Security cannot locate you because of your failure to report a change of address.

If Your Condition Changes

You must notify SSA if there is any change for the better in your condition. Failure to do so could mean you will receive payments you aren't due--money that will have to be repaid. Remember, your case will be reviewed periodically to determine if you are still disabled, so any such abuses are easily detectable.

If You Go To Work

You should tell SSA if you take a job or become self-employed no matter how little you earn. If you are still disabled, you will be eligible for a trial work period and can continue receiving benefits for up to nine months. Also, notify SSA if you have any special work expenses resulting from your disability (such as specialized equipment, a wheelchair, or even some prescription drugs), or if there is any change in the amount of the expenses.

If You Receive Other Disability Benefits

If you are disabled and under the full-retirement age, Social Security benefits for you and your family may be reduced if you are also eligible for workers' compensation (including black lung payments) or for disability benefits from certain federal, state, or local government programs. Tell SSA if you:

• Apply for another type of disability benefit
• Begin receiving another disability benefit or a lump-sum settlement
• Already receive another disability benefit and the amount changes or your payment stops.

If You Get A Pension From Work Not Covered By Social Security

If your disability began after 1985, tell SSA if you start receiving a pension (for which you were first eligible after 1985) from a job where you did not pay Social Security taxes.

Note: For more information, ask at any Social Security office for the fact sheet A Pension From Work Not Covered By Social Security (Publication No. 05-10045).

If You Are A Spouse Or A Surviving Spouse Who Receives A Government Pension

If you are a disabled widow or widower or the spouse of someone getting disability benefits, your Social Security payments may be reduced if you worked for a federal, state, or local government agency where you did not pay Social Security taxes and you receive a pension from that agency. Notify Social Security if you begin to receive such a pension or if the amount of the pension changes.

Note: Ask for the fact sheet Government Pension Offset (Publication No. 05-10007) for more information.

If You Get Married

Here is how marriage may affect your disability benefits:

• If you are getting disability benefits on your own record, your payments will continue and you do not need to report the marriage. But report any change of name so it will appear on your future checks.
• If you are a disabled widow or widower, payments will continue, but remember to report the name change. If your current spouse dies, you may be eligible for higher benefits on his/her work record.
• If you are an adult who was disabled before age 22 and you are getting benefits on the Social Security record of a parent or grandparent, you should report your marriage. Payments generally will end unless you marry a person receiving certain types of Social Security benefits. If your benefits stop because of marriage, they cannot be started again unless the marriage is declared void.

If You Leave The Country

If you leave the United States but remain a U.S. citizen, your Social Security payments can generally continue for as long as you are outside the country and meet all requirements. (The Social Security office has a list of 60 other countries whose citizens can also get Social Security checks if they leave the United States.) However, you must notify Social Security when you plan to leave the U.S. for 30 days or more so that any letters can be sent to the right address. Notifying SSA will also enable you to learn about any special rules that apply to those receiving benefits outside the U.S. Finally, remember to let Social Security know when you return to the U.S.

Caution: If you are a citizen of a country not approved for SSA to send checks, your benefits will be suspended after you have been outside the U.S. for six months, unless you meet specific conditions. Furthermore, if you go to a country where U.S. Treasury Department regulations prohibit sending checks, your benefits will stop immediately.

Note: For more information, ask any Social Security office for the booklet Your Social Security Checks While You Are Outside The United States (Publication No. 05-10137).

If A Beneficiary Dies

When a beneficiary dies, no payment is due for the month of death. For example, if the person dies in June, even if it was on the last day, the check dated July 3 (which is the June check) should be returned. However, if the check is issued jointly to a husband and wife, the survivor should contact any Social Security office about cashing the check. If the beneficiary was using direct deposit, the bank should also be notified of the death so it can return any payments received after death.

When a person getting disability benefits dies, payments to his or her family will be changed to survivors benefits. If the worker received benefits on behalf of children, a new representative payee must be appointed. A death certificate or other proof of death is needed.

How To Report A Change

You can report a change by simply calling Social Security at (800) 772-1213, visiting any SSA office or mailing in the reporting form given to you when you applied for benefits. If you send a report by mail, be sure to include:

• Your name, and if different, the name and Social Security claim number of the person on whose account you get benefits
• Name of person's about whom the report is made
• Your Social Security claim number
• What new information is being reported
• Date of the change
• Your signature, address, phone number, and date

If you are getting benefits on somebody else's record (a spouse, for example), SSA needs his or her Social Security number as well.

Disability Case Reviews

Under federal law, all disability cases must be reviewed from time to time. This review is to make sure that people receiving benefits continue to be disabled and meet all other requirements. Your benefits generally will continue unless there is strong proof that your condition has medically improved and there is evidence that you are able to return to work.

Frequency Of Reviews

How often your case is reviewed depends on the severity of your condition and the likelihood of improvement. The frequency can range from six months to seven years. Your Certificate of Award states when you can expect your first review. Here are general guidelines for reviews:

• Improvement expected—If medical improvement can be predicted when benefits start, your first review should be six to 18 months later.
• Improvement possible—If medical improvement is possible but cannot be predicted, your case will be reviewed about every three years.
• Improvement not expected—If medical improvement is not likely, your case will be reviewed only about once every five to seven years.

What Happens During A Review

After you get a letter announcing the review, someone from your Social Security office will contact you to explain the review process and your appeal rights. You will be asked to provide information about any medical treatment you have received and any work you might have done. Then your file will be sent to the state agency that makes disability decisions for Social Security. An evaluation team that includes a disability examiner and a doctor will carefully review your file and request your medical reports. If reports are not complete or current enough, you may be asked to have a special examination or test that the government will pay for.

Once a decision is reached, SSA will send you a letter explaining it. If SSA decides you are still disabled, your benefits will continue. If they decide you are no longer disabled, you can file an appeal (see below); otherwise, your benefits will stop three months after SSA determined that your disability ended.

Work Incentives

Even after you start receiving disability benefits, you may want to try working again. To help you, there are many "work incentives"—rules that are designed to ease the transition back to work. These rules continue cash payments and Medicare while you work, help with the extra work expenses associated with working with a disability, and help with rehabilitation and training that may lead to a new line of work. A brief description of these rules follows.

Note: For detailed "work incentive" information, ask Social Security for the booklet Working While Disabled...How Social Security Can Help (Publication No. 05-10095).

"Substantial" Work

To understand how work affects your disability benefits, you need to understand how Social Security measures your work. Disability benefits can be paid only if you are unable to do any "substantial" work. The amount of your earnings determines whether your work is substantial:

• In general, if your wages average more than $500 a month (after allowable deductions), you are performing substantial work.
• If your average monthly earnings are between $300 and $500 a month, your work could be considered substantial if the amount and quality of your work are about the same as that done by workers in your area who are not disabled. In making this decision, SSA considers the time, energy, skill, and responsibility involved in your work. Earnings of less than $300 a month are not considered substantial. (There are special rules for blind people who work.)
• If your earnings are "subsidized"—that is, if your employer says you are paid more than the reasonable value of your work—the subsidy part of your pay is not counted as earnings in deciding whether you are performing substantial work.

If you are self-employed, your business income alone may not be the best measure of whether you are doing substantial work. Business income may depend on many other factors, such as the economic situation and services of other people. In such cases, more consideration is given to the amount of time you spend in your business than the amount of your income.

Nine-Month Trial Work Period

You can continue to receive benefits for up to nine months while you try to work. The months need not be consecutive, but they must take place within a 60-month period. Generally speaking, a "trial work" month is any month in which you earn over $200 in gross wages (regardless of amount of time worked) or spend 40 hours in your own business (regardless of amount of earnings). You will receive your full benefits during this period.

Your trial work period will continue only if you are still disabled. If you recover during a trial work period, your benefits will stop after a three-month adjustment period.

At the end of nine months of trial work, SSA will decide if you are able to do "substantial" work. If you can, your benefits will stop after a three-month adjustment period. If you are not able to work, your payments will continue.

36-Month Extended Period Of Eligibility

If your benefits stop because you have returned to work even though you are still medically disabled, you receive special "benefit protection" for the next 36 months. During that time, you can receive a benefit for any month your earnings fall below $500. You do not have to file a new application, but you do have to notify Social Security. If you are unable to continue working, your benefits continue indefinitely so long as you remain disabled.

Medicare Continues

If you are working even though you are still disabled, your Medicare coverage may continue for at least 39 months after the trial work period. Beyond that, you may purchase the coverage with a monthly premium.

Help With Work Expenses

If you need certain equipment or services to help you work, the money you pay for them can be deducted from your earnings in deciding whether you are doing "substantial" work. It does not matter if you also need the items or services for daily living (such as a wheelchair).

The cost of medical equipment, certain attendant care services, prostheses, and similar items and services is generally deductible. The cost of drugs or medical services is deductible only if required because of your condition.

Vocational Rehabilitation

When you applied for disability benefits, information about you and your impairment may have been sent to the state vocational rehabilitation agency. If they offer you services and you refuse them without good reason, your monthly benefits may be withheld. If you have not heard from them and are interested in receiving rehabilitation services, you should give them a call.

Your disability benefits will continue while you receive rehabilitation services. Under a special rule, benefits can continue even if you medically recover while participating in an approved vocational rehabilitation or training program.

Note: For more information, review the Social Security booklet How Social Security Can Help With Vocational Rehabilitation (Publication No. 05-10050).

Benefits For Children and Students

If a child is getting checks on your account, there are several important things you should know about his or her benefits.

When a child reaches 18, the child's benefits stop with the month before the child reaches 18, unless the child remains unmarried and is either disabled or is a full-time elementary or secondary school student.

About five months before the child's 18th birthday, the person receiving the child's benefits will get a form explaining how benefits can continue.

A child whose benefits stopped at 18 can have them started again if he or she becomes disabled before reaching 22 or becomes a full-time elementary or secondary school student before reaching 19.

If a child is disabled, the child can continue to receive benefits after age 18 if he or she has a disability. The child also may qualify for SSI disability benefits.

If a child at 18 is a student, the child can receive benefits until age 19 if he or she continues to be a full-time elementary or secondary school student. When a student's 19th birthday occurs during a school term, benefits can be continued up to two months to allow completion of the term.

Social Security should be notified immediately if the student drops out of school, changes from full-time to part-time attendance, is expelled or suspended, or changes schools. SSA should also be told if the student is paid by his or her employer for attending school.

SSA sends each student a form at the start and end of the school year. It is important that the form be filled out and returned to us. Failure to return the form could result in a suspension of benefits.

A student can keep receiving benefits during a vacation period of four months or less if he or she plans to go back to school full time at the end of the vacation.

A student who stops attending school generally can receive benefits again if he or she returns to school full time before age 19. The student needs to contact Social Security to reapply for benefits.

Benefits for the child of someone getting disability benefits always end if the child marries. The must be reported right away.

If A Person Is Not Able to Manage His Or Her Own Funds

If a person receiving benefits becomes unable to manage his or her funds, someone should let Social Security know. Social Security will arrange for an organization or person called a "representative payee" to receive and use the benefits for that person. The representative payee is responsible for:

• Properly using the benefits on behalf of the beneficiary
• Reporting any events that may affect payments
• Completing a Representative Payee Report when asked to do so by Social Security

Note: Having a power of attorney does not automatically qualify you to be the representative payee.

Note: For more information, ask Social Security for A Guide For Representative Payees (Publication No. 05-10076).

If A Beneficiary Is Convicted Of A Crime

If someone getting Social Security benefits is convicted of a criminal offense, Social Security should be notified immediately. Benefits are not generally paid for time during which a person is imprisoned for a criminal conviction, but any family members who are eligible may continue to receive benefits.

Benefits are also not paid to individuals confined in an institution by court order who, in connection with a criminal offense:

• Have been found guilty but insane
• Have been found not guilty by reason of insanity or similar factors (such as mental disease, mental defect, or mental incompetence), or are incompetent to stand trial.

If You Have A Disability Based On Drug Abuse or Alcoholism

If you are addicted to drugs or alcohol, there are important things you should know about your benefits.

• Your benefits must be paid through a representative payee.
• You can get disability checks only as long as you take treatment for your addiction, if it is available. Your benefits will stop if you do not participate in available treatment. If that happens, you will need to be back in treatment for a certain period of time before SSA can start paying your benefits again. Your payee should let Social Security know if you are not taking treatment for your addiction.
• Disability benefits can be paid for a total of 36 months. In counting the 36-month period, SSA will not count months when your benefits were suspended. Also, SSA will not count months when treatment was not available.

Note: To get more information, ask Social Security for the fact sheet Disability Based On Drug Addiction Or Alcoholism (Publication No. 05-10047).|

Your Right To An Appeal

If you disagree with SSA’s decision, you can appeal it. You have 60 days to file a written appeal with any Social Security office. Generally, there are four levels to the appeals process. They are:

• Reconsideration. Your claim is reviewed by someone who did not take part in the first decision.
• Hearing Before an Administrative Law Judge. You can appear before a judge to present your case.
• Review by Appeals Council. If the Appeals Council decides your case should be reviewed, it will either decide your case or return it to the administrative law judge for further review.
• Federal District Court. If the Appeals Council decides not to review your case or if you disagree with its decision, you may file a lawsuit in a federal district court.

If you disagree with the decision at one level, you have 60 days to appeal to the next level until you are satisfied with the decision or have completed the last level of appeal.

You have two special appeal rights when a decision is made that you are no longer disabled. They are:

• Disability Hearing. As part of the reconsideration process, this hearing allows you to meet face-to-face with the person who is reconsidering your case to explain why you feel you are still disabled. You can submit new evidence or information and can bring someone who knows about your disability. This special hearing does not replace your right to also have a formal hearing before an administrative law judge (the second appeal step) if your reconsideration is denied.
• Continuation of Benefits. While you are appealing your case, you can have your disability benefits and Medicare coverage (if you have it) continue until an administrative law judge makes his or her decision. However, you must request the continuation of your benefits during the first 10 days of the 60 days mentioned earlier. If your appeal is not successful, you may have to repay the benefits.

Source: CPA Site Solutions

At a Glance 

Disability insurance pays an insured person an income when that person is unable to work because of an accident or illness. The answers to the questions below offer you more information about this coverage.

How can I insure against loss of income?

If you were disabled and unable to work as a result of an accident or illness, what would you and your family do for income?
Disability income insurance, which complements health insurance, can replace lost income. At age 40, the average worker faces only a 14 percent chance of dying before age 65 but a 21 percent chance of being disabled for 90 days or more.

There are three basic ways to replace income:

1. Employer-Paid Disability Insurance: This is required in most states. Most employers provide some short-term sick leave. Many larger employers provide long-term disability coverage as well, typically with benefits of up to 60 percent of salary lasting from five years to age 65, and in some cases extended for life.

2. Social Security Disability Benefits: This can be paid to workers whose disability is expected to last at least 12 months and is so severe that no gainful employment can be performed.

3. Individual Disability Income Insurance Policies: Other limited replacement income is available for workers under some circumstances from workers compensation (if the injury or illness is job-related), auto insurance (if disability results from an auto accident) and the Department of Veterans Affairs.

For most workers, even those with some employer-paid coverage, an individual disability income policy is the best way to ensure adequate income in the event of disability. When you buy a private disability income policy, you can expect to replace from 50% to 70% of income. Insurers won’t replace all your income because they want you to have an incentive to return to work. However, when you pay the premiums yourself, disability benefits are not taxed. (Benefits from employer-paid policies are subject to income tax.)

What are the types of disability insurance?

There are two types of disability policies: Short-Term Disability (STD) and Long-Term Disability (LTD):

1. Short-Term Disability Policies (STD) have a waiting period of 0 to 14 days with a maximum benefit period of no longer than two years.

2. Long-Term Disability Policies (LTD) have a waiting period of several weeks to several months with a maximum benefit period ranging from a few years to the rest of your life.

Disability policies have two different protection features that are important to understand.

1. Noncancelable means the policy cannot be canceled by the insurance company, except for nonpayment of premiums. This gives you the right to renew the policy every year without an increase in the premium or a reduction in benefits.

2. Guaranteed renewable gives you the right to renew the policy with the same benefits and not have the policy canceled by the company. However, your insurer has the right to increase your premiums as long as it does so for all other policyholders in the same rating class as you.

In addition to the traditional disability policies, there are several options you should consider when purchasing a policy:

• Additional Purchase Options: Your insurance company gives you the right to buy additional insurance at a later time.

• Coordination of Benefits: The amount of benefits you receive from your insurance company is dependent on other benefits you receive because of your disability. Your policy specifies a target amount you will receive from all the policies combined, so this policy will make up the difference not paid by other policies.

• Cost of Living Adjustment (COLA): The COLA increases your disability benefits over time based on the increased cost of living measured by the Consumer Price Index. You will pay a higher premium if you select the COLA.

• Residual or Partial Disability Rider: This provision allows you to return to work part-time, collect part of your salary and receive a partial disability payment if you are still partially disabled.

• Return of Premium: This provision requires the insurance company to refund part of your premium if no claims are made for a specific period of time declared in the policy.

• Waiver of Premium Provision: This clause means that you do not have to pay premiums on the policy after you’re disabled for 90 days.

How can I purchase disability insurance?

Talk to the agent who sells you your life, health, auto or business insurance—he or she may either sell disability coverage or will be able to refer you to an agent who does.
Your state's insurance department will also have names of agents and companies writing policies in your state.
Make sure that you understand what you are buying and don’t be afraid to ask your agent to explain exactly what is in the policy.

Key things to look for when you shop around:

• The Definition of Disability. Some policies pay benefits if you are unable to perform the customary duties of your own occupation. Others pay only if you are unable to perform any job suitable for your education and experience. Some policies define disability in terms of your own occupation for an initial period of two or three years and then continue to pay benefits only if you are unable to perform any occupation. "Own occupation" policies are more desirable, but more expensive.

• Benefit Period. The benefit period is the amount of time you will receive monthly benefits during your life. Experts usually recommend that the policy you buy pay you benefits until at least age 65, at which point Social Security disability will take over. If you are young, you may consider buying a policy offering lifetime benefits because it will still be relatively inexpensive.

• A policy that will replace from 60 percent to 70 percent of your total taxable earnings. A higher replacement percentage, if available, is more expensive. Evaluate your other sources of income before deciding how much disability coverage you need.

• Coverage for disability resulting from either accidental injury or illness. An accident-only policy is less expensive but does not provide adequate protection. Ideally, both accident and illness coverage should be purchased.

• A cost-of-living increase in benefits. You are buying a policy today that may not pay benefits for a decade or more. Should you need those benefits, you will want them to have kept pace with increases in the cost of living. (Some companies also offer "indexed" benefits, keeping pace with inflation after benefit payments begin.)

• A policy paying "residual" or partial benefits. This type of policy is available so that you can work part-time and still receive a benefit making up for lost income. A standard feature in some policies, and added by a rider to others, a residual benefits policy pays partial benefits based on loss of income without an initial period of total disability.

• Transition Benefits. Offered by some companies, it can offset financial loss during a post-disability period of rebuilding a business or professional practice.

• Ongoing Coverage. A non-cancelable policy which will continue in force as long as the premiums are paid; neither the benefit nor the premium can change. A guaranteed renewable policy keeps the same benefits but may cost more over time since the insurer can increase the premium if it is increased for an entire class of policyholders.

• Financial Stability. Check the financial ratings of an insurer. Your insurance agent or company representative should provide this information or check with the following companies, which rate insurance company strength:
  
  

  • A.M. Best Company, Inc.
    Ambest Rd.
    Oldwick, NJ 08858
    (908) 439-2200
    www.ambest.com

  • Fitch Ratings
    1 State Street Plaza
    New York, NY 10004
    (800) 75-FITCH
    www.fitchibca.com

  • Moody’s Investor Services
    99 Church Street
    New York, NY 10007
    (212) 553-0300
    www.moodys.com

  • Standard & Poor’s Insurance Ratings Services
    55 Water Street
    New York, NY 10004
    (212) 438-2000
    www.standardandpoor.com

  • Weiss Research
    15430 Endeavor Drive
    Jupiter, FL 33478
    (800) 289-9222
    www.weissratings.com

• Waiting Period. Every disability policy imposes a waiting period, also known as the elimination period. This is the number of days you must be disabled before receiving benefits. If you are disabled during the elimination period, you will not receive any benefits, even though you are not able to work. If the elimination period is short, such as 30 or 60 days, the premium will be higher. A longer elimination period may strain your finances more when you need it, but you will be charged a lower premium. Most experts recommend that you select an elimination period of 60 to 90 days. The first check is usually paid 30 days after the waiting period.

How are disability premiums determined?

Disability premiums are based on your age, sex, occupation and the amount of potential lost income you are trying to protect. In general, the lower the chance that your occupation puts you in harm’s way, the lower the premium. The higher the chance of injury, the bigger the premium. So, for instance, an accountant working in an office would have much lower disability premiums than a construction worker.

How can I save money?

There are two ways to keep the cost of disability insurance down:

1. Electing a longer waiting period before benefits begin. If you have enough resources to cover expenses during the first three months of disability, your premiums will be lower than with coverage that starts after 30 days.

2. Electing a shorter benefit period. In this case, benefits are payable to age 65—the age at which you would normally retire—instead of for a lifetime. However, choosing a benefit period of two-to-five years, ending before normal retirement age, could be penny-wise and pound-foolish. You might save money on premiums, but you could be without coverage when you need it most. Disability of long duration poses the greatest financial hardship.

Will my employer provide disability coverage?

Most employers offer some kind of disability insurance, but you should find out exactly what your employer offers before you have to file a claim. Most allow some short-term sick leave, which might last from a few days to as much as six months. In some states, such as Hawaii, New Jersey, New York and Rhode Island, state law requires employers to provide disability benefits for up to 26 weeks.

Check with your benefits department to see if you are covered and if so, how long you must wait before benefits begin and how long payments will last while you are still disabled. Also, ask if your employer’s disability plan takes other disability programs, such as Social Security, into account when calculating your disability pay.

No laws require employers to offer long-term disability (LTD) coverage, but about half of large and mid-sized employers offer it to their workers. Typical group long-term disability benefits replace about 60 percent of the worker’s usual salary. These benefits usually start when short-term benefits are exhausted and continue from five years to life. Usually, group long-term disability insurance is fully paid for by employers, with no contribution expected from employees. When you receive employer-paid disability income, you must pay federal and state income tax on the benefits, unless your company pays it for you.

Where can I get more information?

For more information on disability insurance, you can contact:

• Life and Health Foundation for Education
  2175 K Street, NW, Suite #250
  Washington, DC 20037
  (202) 464-5000
  www.life-line.org

• America’s Health Insurance Plans
  601 Pennsylvania Avenue, NW
  South Building
  Suite 500
  Washington, DC 20004
  www.ahip.org

• Department of Veteran Affairs
  245 West Houston Steet
  New York, NY 10014
  (800) 827-1000
  www.va.gov

• Social Security Administration
  Office of Public Inquiries
  6401 Security Blvd.
  Room 4-C-5 Annex
  Baltimore, MD 21235-6401
  (800) 772-1213
  www.ssa.gov

© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED -

Do you have enough disability insurance coverage? If you need to purchase private coverage, how can you get the most for your money? Have you neglected to protect what could be your most important financial asset? For many individuals, this is not the home or portfolio—it’s earning power. This Financial Guide provides you with information to assist you in determining how much disability insurance you should have.

Even if your employer provides you with disability coverage, it’s vital to examine the terms and conditions of that coverage, since it may not provide you with adequate coverage to meet your needs.

If you couldn’t work, how long could you continue to pay your bills? Chances are, whatever employer-provided and government-provided coverage you have is inadequate, and you need to provide yourself with private disability coverage. Here are guidelines designed to ensure that you are adequately covered.

Planning For The Worst-Case Scenario

Many of us have life insurance, however very few of us have long-term disability coverage. Yet according to statistics, workers are more likely to sustain a long-term disability (one lasting longer than 90 days) than die at an early age. Long-term disability insurance is fairly expensive, and people tend to think that they will be protected by workers’ compensation or other sources. However, Social Security, workers’ compensation, and employer-offered long-term coverage are often inadequate.

Note: We’ll show you how to check up on the adequacy of various sources of coverage in this Guide

Here’s a typical disability scenario—one that could happen to anyone.

Example: Roger Roe, a former executive for a large company and currently self-employed as a consultant, earns $200,000 per year. Last year, his osteoarthritis suddenly became much worse, and he could no longer bend his back, lift anything, or stand in one place for longer than a few minutes. Roger was forced to discontinue his consulting business, and attempted various career changes, none of which panned out. Fortunately for Roger, he had taken out a disability policy years ago, and had continued paying the $2,000-per-year premiums. The policy will now pay him $20,000 per year in benefits—a badly needed income.

Checking Up On What You Have

Here are some suggestions for investigating the disability coverage you may already have, in order to find out whether it is adequate to meet your needs.

Employer-Provided Coverage

If your employer provides long-term disability coverage—which must usually be paid for by the employee—it’s a good idea to buy it. The premiums are probably discounted from what you’d pay for a private policy.

However, take a good look at what the employer-offered policy covers, and buy a private policy if you decide you need it. Many employer-provided group policies are inadequate in that they limit either the term of the coverage or the amount of benefits paid. For instance, benefits may last only a few years, or benefit payments may represent only a small part of executive salaries.

Check up on the following:

• How long does the disability coverage last?
• How much is the benefit?

Note: Group plans may have a benefit cap of $5,000 per month. Individual plans may also have such a cap.

• What percentage of your income are you covered for?

Note: Generally, you cannot obtain insurance for more than 60% of your income.

• Who pays the premiums?

Tip: Tax-wise, you’re better off paying the premiums yourself, instead of having your employer pay them.

• If you receive bonuses or commissions, are these covered by the group policy? If not, and if bonuses or commissions make up a substantial part of your income, you’ll probably need supplemental coverage.
• What is the definition of disability in the group policy? Own-occupation, any occupation, or income-replacement? (Please see the discussion of these three terms in the section on private policies.)

Governmental Coverage

Worker’s compensation covers injuries that happen on the job. Benefits vary widely from state to state, since benefit amounts depend on state provisions. The average weekly maximum is about $450, while the average weekly minimum (where there is a minimum) is $90. Most states pay benefits for the employee’s lifetime in cases of permanent total disability.

Tip: To get details on worker’s comp benefits, contact your state's Department of Labor.

In addition to the requirement that an injury be work-related, the payments you would receive under worker’s comp may be inadequate.

Veterans whose disability is related to a service-related injury may be eligible to receive disability benefits in certain states. If you are a veteran, find out whether a disability fund exists in your state.

Social Security provides long-term disability coverage. However, more than half of the individuals who apply for Social Security disability are denied coverage, and the system leaves many gaps. Further, the payment amounts—from $500 to $2,000 per month--may be inadequate for many individuals.

Planning Aid: Standard And Poor's Insurance Ratings will allow you to find S & P ratings and financial strength ratings of various insurance companies.

What To Look For In A Private Policy

If you decide you need supplemental coverage, here are some things to look for in a private policy, as well as some suggestions for getting the most for your money.

Be Ready To Prove Your Income Level

A disability insurance company will usually not cover you for more than 60% of your income. Look for a policy that provides coverage for this level.

When you shop for a disability policy, be ready to prove your income level.

Watch Out For The "Definition Of Disability"

The definition of disability in a policy is extremely important. It tells you under what circumstances you will qualify to receive benefits.

Own-occupation coverage pays benefits if you can’t work at your chosen field—e.g., attorney or teacher. Own-occupation policies are the most expensive type of disability coverage because they provide the broadest coverage. (If you cannot perform the duties of your own occupation, you can take a job in a related field, make a decent income, and still collect the benefits.)

Any-occupation coverage pays benefits if you can’t work at any occupation for which your education level and training has prepared you. Thus, if you can no longer perform the duties of a nuclear physicist, but you can teach physics at college level, you will not receive benefits.

Income-replacement policies, which are less expensive than own-occupation or any-occupation, replace whatever portion of your income you are no longer able to earn.

Waiting Period

The longer the waiting period before benefits kick in, the less your premium will be. If you have adequate sick leave, short-term disability, and an emergency fund, and can support a longer waiting period, choose a policy with a longer waiting period.

Waiting periods can last as long as 730 days.

How Long Will Coverage Last?

It’s a good idea to get a benefit period that lasts until age 65, at which point Social Security payments will begin. Be aware that many policies cover you for only two to five years, an inadequate period.

Unless you are so young that you haven’t yet had time to qualify for Social Security, a policy that provides lifetime benefits, at costly premiums, is generally not worth it.

Residual Benefits

If you are able to work only part-time instead of your previous full-time hours, will you receive benefits? Unless your policy states that you are entitled to residual benefits, you won’t receive anything unless you are totally unable to work.

Note: Residual benefits may be added on as a rider in some policies.

Non-Cancelable vs. Guaranteed Renewable

The difference between these two terms is very important. If a policy is "non-cancelable," you will pay a fixed premium throughout the contract term. Your premium will not go up for the term of the contract. If it is "guaranteed renewable," your premiums could go up.

Riders And Options

These are all additions to policies, at a further expense to you.

Increasing Coverage

An option to increase coverage gives you the ability to buy more coverage without being turned down for health reasons.

You will pay about 10% of your premium to have this option.

Cost-Of-Living

The cost-of-living rider, which can add 20 to 40% to your premium, pays you increased benefits after you become disabled.

Social Security

If you qualify for Social Security disability, the insurer gets to decrease your coverage.

Tip: Take this rider if it is available. It will save you money on your premium.

Waiver-of-Premium

This important rider allows you to stop paying premiums once you become disabled.

Tip: Weigh the cost of the waiver-of-premium rider against the cost of continuing to pay the premiums after disability.

Return-of-Premium

This is an option that allows you some cash back if you do not collect on your disability coverage after a certain amount of time.

Tip: This rider is too expensive—about 50% of your premium. Don’t take it.

Check Out Your Insurer

Before buying a policy, check the financial soundness of your insurer. If your insurer goes bankrupt, you may have to shop for a policy later in life, when premiums are more expensive.

Premium-Reducing Tips

• Try to get disability insurance on a low-load (commission) basis. Look at the policies offered by direct sellers such as the Wholesale Insurance Network of Tampa of USAA in San Antonio. (But don’t buy insurance from an insurer that doesn’t check out as financially sound.)
• If you’re young, consider buying an annual renewable disability income policy. This is similar to term life insurance. Then, when you are older an more able to afford the policy, convert to a permanent policy.
• Try to get group coverage from a trade association or other organization you belong to.
• If you’re female, look for an insurer that has unisex pricing. Otherwise, women will generally pay higher premiums.
• Investigate discounts that may be available.

Source: CPA Site Solutions

Should I purchase my own disability insurance policy?

Many of us have life insurance, however very few of us have long-term disability coverage. Yet according to statistics, workers are more likely to sustain a long-term disability (one lasting longer than 90 days) than die at an early age.

Long-term disability insurance is fairly expensive, and people tend to think that they will be protected by workers’ compensation or other sources. However, Social Security, workers’ compensation, and employer-offered long-term coverage are often inadequate.

How much disability insurance should I have?

A disability insurance company will usually not cover you for more than 60% of your income. Look for a policy that provides coverage for this level. When you shop for a disability policy, be ready to prove your income level. If you purchase the policy and pay the premiums yourself, the income received will not be taxable. Therefore 60% should come close to replacing your after tax income?

What does workers compensation insurance cover?

Worker’s compensation covers injuries that happen on the job. Benefits vary widely from state to state, since benefit amounts depend on state provisions. The average weekly maximum is about $450, while the average weekly minimum (where there is a minimum) is $90. Most states pay benefits for the employee’s lifetime in cases of permanent total disability.

Tip: To get details on worker’s comp benefits, contact your state Department of Labor.

In addition to the requirement that an injury be work-related, the payments you would receive under worker’s comp may be inadequate.

How is disability defined?

The definition of disability in a policy is extremely important. It tells you under what circumstances you will qualify to receive benefits.

Own-occupation coverage pays benefits if you can’t work at your chosen field—e.g., attorney or teacher. Own-occupation policies are the most expensive type of disability coverage because they provide the broadest coverage. (If you cannot perform the duties of your own occupation, you can take a job in a related field, make a decent income, and still collect the benefits.)

Any-occupation coverage pays benefits if you can’t work at any occupation for which your education level and training has prepared you. Thus, if you can no longer perform the duties of a nuclear physicist, but you can teach physics at college level, you will not receive benefits.

Note: Many policies are own-occupation for a period of years, at which point they convert to any-occupation.

How is disability defined?

Experts estimate that about 43% of us will spend some time in a nursing home at some point. But the risk of needing nursing home care before age 75 is relatively low. Also, most people will not need nursing home care for longer than a year.

Your chances of needing long-term care vary with your age, health, family history and longevity, exercise habits, diet, smoking, and gender. Women are at higher risk because they live longer.

How does long-term care insurance work?

Long-term care insurance policies pay a set dollar amount per day for covered care during the benefit period stated in the policy.

Example: You choose a policy that pays $160 per day for five years. The maximum that policy will pay is $292,000 ($160 per day, times 365 days, times 5 years).

The older the individual covered, the higher the premium. For instance, premiums for a set amount of coverage on a 70-year-old individual are about three times those that would apply to a 50-year-old.

Most long-term care policies are indemnity-type policies, meaning they will pay (up to the policy’s limits) for actual charges by the care provider. Some long-term care policies, instead of being based on indemnity, pay daily benefit amounts to the insured rather than paying for actual charges. The latter type of policy offers insureds greater flexibility (e.g., allowing them to pay for home care) and less paperwork.

In a long-term care policy, what is the elimination period?

This period constitutes the number of days the insured must wait—after becoming eligible for benefits—before coverage actually begins.

The elimination period can range from zero to 90 days, or up to one year. The longer the elimination period, the lower the premium.

How should I select a long-term care insurance provider?

If you decide that long term care insurance (LTCI) is your best option, it is important to shop around for the right company. Some states have enacted important consumer protections in the LTCI area, while others have not. Do not assume the company is a safe bet just because it is licensed by the state insurance department to sell LTCI.

No matter how good a policy sounds, it is worth little if the company won’t be there when it comes time to pay. Buy from a company with strong financial reserves. Unfortunately, there is no foolproof method for determining which companies are financially strong. However, it pays to look up a company's rating by A.M. Best or Standard and Poor's, both of which evaluate the financial health of insurance companies.

Tip: Purchase long-term care insurance from a company that has an A+ or A++ rating from Best or an A, AA, or AAA rating from Standard and Poor's. Most public libraries have these references.

When can I qualify for Medicaid insurance?

Eligibility rules vary from state to state, but beneficiaries are generally required to "spend down" their income and assets to qualify. New laws in many states make it possible for the spouses of Medicaid nursing home residents to keep more income and assets than previously allowed.

By law, nursing homes cannot discriminate against Medicaid patients, but in reality, many keep "waiting lists" for them while enrolling patients with more income and assets. Medicaid coverage for home care is very limited in most states.

Source: CPA Site Solutions

Most employers offer some kind of disability insurance, but you should find out exactly what your employer offers before you have to file a claim. Most allow some short-term sick leave, which might last from a few days to as much as six months. In some states, such as Hawaii, New Jersey, New York and Rhode Island, state law requires employers to provide disability benefits for up to 26 weeks.

Check with your benefits department to see if you are covered and if so, how long you must wait before benefits begin and how long payments will last while you are still disabled. Also, ask if your employer’s disability plan takes other disability programs, such as Social Security, into account when calculating your disability pay.

No laws require employers to offer long-term disability (LTD) coverage, but about half of large and mid-sized employers offer it to their workers. Typical group long-term disability benefits replace about 60 percent of the worker’s usual salary. These benefits usually start when short-term benefits are exhausted and continue from five years to life. Usually, group long-term disability insurance is fully paid for by employers, with no contribution expected from employees. When you receive employer-paid disability income, you must pay federal and state income tax on the benefits, unless your company pays it for you.

© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED -

If you were disabled and unable to work as a result of an accident or illness, what would you and your family do for income?

Disability income insurance, which complements health insurance, can replace lost income. Forty-three percent of all people age 40 will have a long-term (lasting 90 days or more) disability event by age 65.

There are three basic ways to replace income:

1. Employer-paid disability insurance
   This is required in most states. Most employers provide some short-term sick leave. Many larger employers provide long-term disability coverage as well, typically with benefits of up to 60 percent of salary lasting from five years to age 65, and in some cases extended for life.
2. Social Security disability benefits
   This can be paid to workers whose disability is expected to last at least 12 months and is so severe that no gainful employment can be performed.
3. Individual disability income insurance policies
   Other limited replacement income is available for workers under some circumstances from workers compensation (if the injury or illness is job-related), auto insurance (if disability results from an auto accident) and the Department of Veterans Affairs.
   
   For most workers, even those with some employer-paid coverage, an individual disability income policy is the best way to ensure adequate income in the event of disability. When you buy a private disability income policy, you can expect to replace from 50% to 70% of income. Insurers won’t replace all your income because they want you to have an incentive to return to work. However, when you pay the premiums yourself, disability benefits are not taxed. (Benefits from employer-paid policies are subject to income tax.)

© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED -
 

Talk to the agent who sells you your life, health, auto or business insurance—he or she may either sell disability coverage or will be able to refer you to an agent who does.

Your state's insurance department will also have names of agents and companies writing policies in your state.

Make sure that you understand what you are buying and don’t be afraid to ask your agent to explain exactly what is in the policy.

Key things to look for when you shop around

The definition of disability
Some policies pay benefits if you are unable to perform the customary duties of your own occupation. Others pay only if you are unable to perform any job suitable for your education and experience. Some policies define disability in terms of your own occupation for an initial period of two or three years and then continue to pay benefits only if you are unable to perform any occupation. "Own occupation" policies are more desirable, but more expensive.

Benefit period
The benefit period is the amount of time you will receive monthly benefits during your life. Experts usually recommend that the policy you buy pay you benefits until at least age 65, at which point Social Security disability will take over. If you are young, you may consider buying a policy offering lifetime benefits because it will still be relatively inexpensive.

A policy that will replace from 60 percent to 70 percent of your total taxable earnings
A higher replacement percentage, if available, is more expensive. Evaluate your other sources of income before deciding how much disability coverage you need.

Coverage for disability resulting from either accidental injury or illness
An accident-only policy is less expensive but does not provide adequate protection. Ideally, both accident and illness coverage should be purchased.

A cost-of-living increase in benefits
You are buying a policy today that may not pay benefits for a decade or more. Should you need those benefits, you will want them to have kept pace with increases in the cost of living. (Some companies also offer "indexed" benefits, keeping pace with inflation after benefit payments begin.)

A policy paying "residual" or partial benefits
This type of policy is available so that you can work part-time and still receive a benefit making up for lost income. A standard feature in some policies, and added by a rider to others, a residual benefits policy pays partial benefits based on loss of income without an initial period of total disability.

Transition benefits
Offered by some companies, it can offset financial loss during a post-disability period of rebuilding a business or professional practice.

Ongoing coverage
A non-cancelable policy which will continue in force as long as the premiums are paid; neither the benefit nor the premium can change. A guaranteed renewable policy keeps the same benefits but may cost more over time since the insurer can increase the premium if it is increased for an entire class of policyholders.

Financial stability
Check the financial ratings of an insurer. Your insurance agent or company representative should provide this information or check with the following companies, which rate insurance company strength:

A.M. Best Company, Inc.
Ambest Rd.
Oldwick, NJ 08858
908-439-2200
http://www.ambest.com

Fitch Ratings
1 State Street Plaza
New York, NY 10004
1-800-75-FITCH
http://www.fitchibca.com

Moody’s Investor Services
99 Church Street
New York, NY 10007
212-553-0300
http://www.moodys.com

Standard & Poor’s Insurance Ratings Services
55 Water Street
New York, NY 10004
212-438-2000
http://www.standardandpoor.com

Weiss Research
15430 Endeavor Drive
Jupiter, FL 33478
800-289-9222
http://www.weissratings.com

Waiting period
Every disability policy imposes a waiting period, also known as the elimination period. This is the number of days you must be disabled before receiving benefits. If you are disabled during the elimination period, you will not receive any benefits, even though you are not able to work. If the elimination period is short, such as 30 or 60 days, the premium will be higher. A longer elimination period may strain your finances more when you need it, but you will be charged a lower premium. Most experts recommend that you select an elimination period of 60 to 90 days. The first check is usually paid 30 days after the waiting period.

© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED -

There are two ways to keep the cost of disability insurance down:

Electing a longer waiting period before benefits begin
If you have enough resources to cover expenses during the first three months of disability, your premiums will be lower than with coverage that starts after 30 days.

Electing a shorter benefit period
In this case, benefits are payable to age 65—the age at which you would normally retire—instead of for a lifetime. However, choosing a benefit period of two-to-five years, ending before normal retirement age, could be penny-wise and pound-foolish. You might save money on premiums, but you could be without coverage when you need it most. Disability of long duration poses the greatest financial hardship.
 

© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED -
 

There are two ways to keep the cost of disability insurance down:

Electing a longer waiting period before benefits begin
If you have enough resources to cover expenses during the first three months of disability, your premiums will be lower than with coverage that starts after 30 days.

Electing a shorter benefit period
In this case, benefits are payable to age 65—the age at which you would normally retire—instead of for a lifetime. However, choosing a benefit period of two-to-five years, ending before normal retirement age, could be penny-wise and pound-foolish. You might save money on premiums, but you could be without coverage when you need it most. Disability of long duration poses the greatest financial hardship.
 

© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED -
 

There are two types of disability policies: Short-Term Disability (STD) and Long-Term Disability (LTD):

1. Short-Term Disability policies (STD) have a waiting period of 0 to 14 days with a maximum benefit period of no longer than two years.
2. Long-Term Disability policies (LTD) have a waiting period of several weeks to several months with a maximum benefit period ranging from a few years to the rest of your life.

Disability policies have two different protection features that are important to understand.

1. Noncancelable means the policy cannot be canceled by the insurance company, except for nonpayment of premiums. This gives you the right to renew the policy every year without an increase in the premium or a reduction in benefits.
2. Guaranteed renewable gives you the right to renew the policy with the same benefits and not have the policy canceled by the company. However, your insurer has the right to increase your premiums as long as it does so for all other policyholders in the same rating class as you.

In addition to the traditional disability policies, there are several options you should consider when purchasing a policy:

1. Additional purchase options
   Your insurance company gives you the right to buy additional insurance at a later time.
2. Coordination of benefits
   The amount of benefits you receive from your insurance company is dependent on other benefits you receive because of your disability. Your policy specifies a target amount you will receive from all the policies combined, so this policy will make up the difference not paid by other policies.
3. Cost of living adjustment (COLA)
   The COLA increases your disability benefits over time based on the increased cost of living measured by the Consumer Price Index. You will pay a higher premium if you select the COLA.
4. Residual or partial disability rider
   This provision allows you to return to work part-time, collect part of your salary and receive a partial disability payment if you are still partially disabled.
5. Return of premium
   This provision requires the insurance company to refund part of your premium if no claims are made for a specific period of time declared in the policy.
6. Waiver of premium provision
   This clause means that you do not have to pay premiums on the policy after you’re disabled for 90 days.

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