By ANNA WILDE MATHEWS Wall Street Journal January 20, 2010
Disability-insurance benefits from the workplace and the government are getting harder to come by-and that’s putting more pressure on consumers to purchase their own coverage in case a medical condition keeps them from working.
But disability insurance can be confusing. Policies may include conditions that make it tough for people filing claims to actually qualify for the benefits. And some policies may limit payouts for certain diagnoses, particularly mental illness. To protect themselves, consumers considering buying disability coverage need to read the fine print.
The percentage of companies that paid all or part of the cost of workers’ private long-term disability insurance fell to 48% last year, from 59% in 2002, according to LIMRA, an association of financial-services and insurance companies. Many employers are “taking a step back in terms of what they pay and putting the onus on employees” to purchase richer benefits if they choose, says Michael Bailey, a principal at Mercer, a consulting unit of Marsh & McLennan Cos.
Vetting a Policy
If you are thinking about purchasing disability coverage, here are some things to check:
- Details of what it pays: If it’s a percentage of your income, does that include just your base salary, or other things like commissions?
- Portability: If it’s being purchased through your employer, can you keep it if you leave?
- What triggers the benefit: Do you have to be unable to do any job comparable to your own?
- Limits on payouts: For long-term policies, are benefits for certain conditions, like mental illness, capped?
Here are some online sources of information:
- Social Security Administration: www.socialsecurity.gov/pubs/10029.html
- Council for Disability Awareness: www.disabilitycanhappen.org
- Consumer Federation of America: Go to www.consumerfed.org, click on Publications, then Brochures, and scroll down.
At the same time, disability claims are pouring in to the Social Security Administration, and that’s resulting in bigger backlogs. The agency expects claims to jump to 3.3 million in the current fiscal year, ending Sept. 30, from 2.6 million two years earlier. That’s led to a greater number of cases pending-about 794,000 this month, up from about 557,000 in late 2008.
“With the number of cases rising and the number of claims awaiting a decision,” the waiting time for claims to be processed could tick upward, an agency spokesman said. He attributed the increase in claims largely to out-of-work people scrambling to make up for lost income.
What that means is that consumers should understand what benefits they might currently be able to access, and consider purchasing additional coverage to make up any shortfall.
Government Safety Net
Start by understanding what the government can provide. Social Security is only available to those with a condition that is either expected to leave them unable to work for at least a year, or is terminal. For those who do qualify-around 36% on average on the first application, though more win benefits after appealing-the payout averages just 40% of their predisability income. For high earners, the share will be smaller.
Tom Klett, a consultant with Towers Watson & Co., says qualified applicants should count on waiting three to five months or longer to get Social Security disability benefits. And with the number of applicants growing, “if you’re depending on that [benefit], you’ve got problems,” he says. Consumers should also check if theirs is one of the few states that provide some additional disability benefits.
Buy a Policy at Work
Figure out what your employer provides. If it pays all, or even a share, of the premiums for disability insurance, that’s your best option. If this is the case, make sure you have both short-term coverage, which tends to last for a few months, and long-term, which often only starts paying after a set time period, often 90 to 180 days.
Watch for a possible gap between them, since some employers’ short-term policies may not stretch to when the long-term ones kick in.
Even if your employer makes disability a voluntary benefit, with the premium coming out of your paycheck, it’s likely to be a better deal than purchasing an individual policy on your own. Still, particularly if you are young and healthy, you might want to check with an insurance agent.
Keep in mind that if you are buying a policy through your employer, you might be able to pay the premiums from your paycheck on a pretax basis. But this will mean you will owe taxes on the payouts you receive after filing a claim. You should also check whether you will be able to keep the coverage if you leave that company.
Ilene Sturrock, 46 years old, of Los Angeles bought a short-term disability policy in 1998, through her job as an office manager. She kept paying the $56-a-month premiums, even though she left that employer years ago and is currently out of work. She’s used the benefits several times, including an eight-week break for surgery four years ago, and a three-month gap in 2007 when she broke her foot. “It pays off in the long run,” she says.
If you are buying an individual long-term disability policy, the initial premiums will be set based on factors including your age, health status and occupation, according to insurer Unum Group. You may have the option of a level premium, which won’t change over the life of the policy, or premiums that could rise at a fixed rate. If you’re joining your employer’s group disability policy, the premiums will be adjusted based on the claims history of the entire group.
A growing number of employers offer basic disability coverage and let workers buy more. But you’ll have to figure out how rich a benefit you need. Long-term disability insurance will generally pay a percentage of your predisability income-60% is common-and it may not include extras such as bonuses. Also, be aware that most private disability policies require you to apply for Social Security benefits, and then subtract the government payout from what the insurer pays, a move called an “offset.”
Plan for Health-Care Costs
In figuring out your likely expenses during a period of disability, keep in mind that if you are out of work for an extended period, you may lose your job, and have to start paying for health coverage. Though disabled people who receive Social Security benefits can qualify for Medicare, there is a two-year lag before the federal health coverage kicks in.
Another key thing to check is under what circumstances the disability insurance benefit will pay out. It’s better if the money is triggered when you can’t do your current job, says Andrew Imparato, chief executive of the American Association of People with Disabilities. But some policies say that if you can do any comparable job, you aren’t truly disabled.
-This will be the last Healthy Consumer column, though I will continue writing about some of the same issues for the Journal. The best part has been hearing from readers about their own health-care experiences, and I hope that will continue. Email firstname.lastname@example.org.
Write to Anna Wilde Mathews at email@example.com