LTD Offsets Video
Mason Waring: Hello, my name is Mason Waring. I’m an attorney and partner at Chisholm Chisholm & Kilpatrick. I’m joined here today with my colleague, attorney Leah Small. We devote much of our practice to representing disabled workers in their long-term disability insurance claims. We handle initial claims, appeals, and court litigation. These are individuals who either purchased long-term disability policies themselves from the insurance company or they received this coverage as an employment benefit from their employers.
Today, we’re going to talk about long-term disability benefit offsets. If you have long-term disability insurance coverage, you might think, “I purchased a policy, it has a certain benefit or the policy that I get through my employer pays me, say, 60% of my pre-disability earnings, that’s what I’m going to get if I’m disabled and otherwise entitled to benefits under the policy.” That may not be the case. If you are receiving other income benefits like social security, if maybe you can’t work full time in your job and you’re working part-time and earning some income, those dollars may reduce your monthly long-term disability benefits. This is an important thing to consider for your financial planning purposes if you are not disabled but you have this coverage, or if you are disabled and you basically want to understand what your monthly benefit is comprised of. These offsets are important.
So, let’s get started, Leah. What are long-term disability benefit offsets?
Leah Small: You touched on this a little bit. Generally, if you become disabled and have long-term disability coverage, you’ll receive a monthly benefit that’s either a fixed dollar amount or an amount that’s a certain percentage of your pre-disability earnings. We normally refer to that as your gross long-term disability benefits. However, as you mentioned, in many of these policies, especially ones that you receive as a benefit through your employment, there are provisions that allow the insurance company to deduct other benefits or income you are receiving from your gross LTD benefit. Often, these may be labeled other income benefits or deductible sources of income, but we commonly refer to them as benefit offsets because they reduce the amount the insurance company has to pay you each month. And the amount that you get after those offsets is what we refer to as your net monthly LTD benefit.
Mason: What are some common offsets that we see in long-term disability policies?
Leah: I’ll start off by saying it’s important for you to read your own policy because there can be different offsets in different policies, but there are some that we see in almost every policy that has these provisions. Some common ones, as you mentioned, include Social Security, both disability from Social Security and retirement benefits, workers comp benefits, unemployment benefits you applied for unemployment. If you receive severance from your employer, that can be an offset. If you’re receiving retirement benefits, state disability benefits, benefits from the VA due to disability, pension benefits, salary continuance benefits, sick pay. There’s a lot. And so, again, it’s important to read your policy. Again, if you got a settlement, a personal injury settlement, that can be an offset. And also, as you mentioned, if you’re working, maybe, part-time or in another occupation, your work earnings could be an offset as well.
Mason: Right. It could be earnings, but it could be other- You could receive other types of money and I just want to emphasize for personal injury settlement. If you’re disabled, maybe because of injuries from a car accident or something like that, and someone else was responsible and you recover funds, the insurance company may be entitled to some or all of those funds. You want to talk to your personal injury lawyer about this and make sure you’re taking all these things into consideration.
Let’s talk next about calculating the offsets. What are some common things we see as to how the insurance companies calculate the offsets, Leah?
Leah: Again, the long-term disability policy will explain how your net benefit is going to be calculated if you’re receiving these other income benefits that are considered offset. And often, that calculation depends on the type of other income benefit that’s involved. Sometimes, it’s just a straight dollar-for-dollar reduction and that often is the case with things like state disability or pension benefits, or sick pay. If your gross long-term disability benefit is $2000 per month, but you receive $1000 per month in pension benefits, the insurance company will just deduct that $1000 from your gross LTD benefit and only pay you $1000 so your total benefit from both sources equals that $2000.
But it’s not always a straight dollar-for-dollar reduction. We see this a lot in Social Security benefits. Often, if a claim is disabled and they’re getting Social Security, they have a base social security benefit, but the Social Security administration will also increase, oftentimes, the benefit each year due to cost of living adjustments. But often, the long-term disability policies, the insurance company will only offset that base benefit. They won’t increase the offset as your social security benefit increases. Not always, so again, read your policy to see how it’s calculated but oftentimes, those increases in Social Security are not considered offsets.
Similarly, as we talked about the personal injury settlements, the insurance company might be entitled to all or a portion of that settlement if those injuries are what caused your disability. However, oftentimes, your policy may specify that they only get the portion of the settlement that’s attributable to loss of earnings. For example, if you receive $100,000 in a personal injury settlement, but only $30,000 of that is for damages in your loss of earnings, the insurance company may only be able to offset the $30,000, not the full $100,000.
Finally, if you’re working while disabled, it can get a lot more complicated. There are a lot of formulas insurance companies use to determine how they’re going to take your work earnings into account. And because they can vary so widely, it’s really important to read your policy to make sure you understand what that formula is and how your work earnings are going to impact your LTD benefit. It’s also important to keep in mind if you are working and receiving long-term disability, that some policies put a cap on the amount you’re allowed to earn and still receive LTD benefits. And if you exceed that cap, your benefits might be terminated. So, it’s important to keep that in mind as well.
Mason: Thinking of caps, what happens when the offset exceeds or essentially erases the LTD benefit?
Leah: Generally, even if the offsets, essentially, erase the LTD benefit, you’ll still receive some amount each month from the insurance company. Most LTD policies have what we call a minimum benefit provision, which is the lowest amount the insurance company will pay you each month. Again, it varies so read your policy. But usually, it’s typically [inaudible] of $100 or 10% of your gross monthly benefit. This is, essentially, a guaranteed amount that you’ll receive even if other income offsets are greater than your gross LTD benefit. And you may also receive the minimum benefit if your offsets aren’t greater, but they would reduce your LTD benefit to below the minimum benefit. Then, you’ll still get the minimum benefit.
For example, again, if we assume you’re gross LTD benefit is the $2000 per month, but you’re receiving $2100 in other income benefits each month, your net LTD benefit would likely be $200 per month, even though the offsets are greater than your gross LTD benefit. Alternatively, if your offsets are $1900 per month, if we did a straight reduction, the insurance company would only have to pay you $100. They’ll still pay you that $200 per month if that’s the minimum benefit.
Mason: Sometimes, income that is subject to offsets comes in on a monthly basis, like part-time work earnings. But sometimes it’s a lump sum, like a personal injury settlement or a retroactive award on Social Security. How does the insurance company typically handle that?
Leah: Typically, if the award of other income benefits covers a former time period during which you received your gross monthly long-term disability benefit, there’s likely going to be an overpayment on your long-term disability claim, and you’re going to owe money back to the insurance company. Because this means that if you receive that lump sum retro award, that means that the insurance company should have been offsetting those other income benefits all along, but they weren’t. So they paid you more than you were entitled to. Often when this happens, almost the entire lump sum retro award that you get ends up going back to the insurance company.
Similarly, if you receive a lump sum that doesn’t cover a specific time period, which is often the case with personal injury settlements, often, the insurance company will assign a timeframe to determine how much it should deduct from each of your monthly benefits to take that offset.
Mason: Leah, what advice would you have for our viewers who might say, “Why should I apply for, say, social security benefits if they’re just going to go to the insurance company?”
Leah: Well, I’ll say oftentimes, the insurance company can make you apply for these benefits. They might not have a choice. Many LTD policies require the claimant to apply for all other income benefits that you are eligible for mainly because they want to take advantage of that offset and pay you less each month. Further, these policies often provide that if you don’t apply for these other income benefits, the insurance company can begin estimating the amount you would get if you did apply and receive them and start offsetting that amount. So, you can end up in the position where the insurance company is taking the offset, but you’re not actually receiving the other income benefit and you’re in a worse financial position.
Mason: Also, in some circumstances, there’s still a benefit to you. If there was a complete offset, you have the minimum benefit but also, the insurance companies, as you said earlier, Leah, will only usually basically offset on the original benefit amount. And Social Security, over time, if you’re on claim, if congress approves the cost-of-living increase, your benefits will go up and they typically do not offset that amount. Additionally, after you’ve been on social security for a time, you may become Medicare-eligible. And so, there are some other reasons to apply for Social Security. It doesn’t work out for everyone. There are certain people and certain tax scenarios where it’s less advantageous to apply for Social Security. But again, you may be required to under the terms of your policy. This underscores why it’s important to read your policy, understand what your rights and obligations are because if you ignore it, you could really wind up in some trouble down the road on that.
What should our viewers do if they’re on claim and the insurance company begins to apply an offset?
Leah: As we said multiple times, first thing they should do is read their policy to determine if the offset is an appropriate one. As we mentioned, your policy should outline what other income benefits are considered offsets. So, you want to read that and see if what the insurance company is offsetting is proper under your policy. It’s also important to read the policy because there can be a lot of nuances involved with these offset provisions. For example, although other income you’re receiving may fall into an offset category generally, it may not properly be an offset on your policy for another reason. This comes up a lot with pension benefits. Your LTD policy might say, we get to offset pension benefits you’re receiving, but your policy might also say that it only takes offsets for benefits you’re receiving as a result of the same disability for what you’re receiving in long-term disability benefits. If you’re receiving pension benefits, but not because of your disability, then it wouldn’t be appropriate for the insurance company to take that offset even though, as I said, pension benefits generally are an offset.
If you review your policy and you’ve determined that it is appropriate for the insurance company to take the offset, the next step is that you should calculate to determine if they’re taking the correct amount. Check the insurance company’s calculations to make sure they’re doing it correctly. For example, as we’ve talked about, are they including a cost-of-living adjustment in their offset when it shouldn’t under the policy? Are they offsetting your entire personal injury settlement when they should only be taking a portion of it? Those are the kind of things you want to look for to make sure they’re taking the correct amount each month.
Mason: Sorry to interrupt, Leah, but you could put that on the insurance company and that’s something that we do sometimes. We say, “Look, you’re saying that you’re going to apply an offset of X amount each month. Can you please provide us with a detailed computation as to how you arrived at that and what you based it on?” That’s a good starting point to understand where they’re coming from.
Two more points. This discussion made me think about some experiences we’ve had. In one tricky area, it’s 401K distributions. We’ve seen circumstances where clients were financially strained after going out of work on disability. Some of them, maybe, their LTD benefits were terminated, and the insurance company is still going after them for an offset and they’re trying to pay mortgage, medical expenses, and so forth. So, they looked in their 401k to take a distribution. It’s a tough thing to do because there are some serious tax consequences associated with that. But also, there could be some offset implications. Many plans will provide that the insurance company will treat the percentage of your 401k that was from employer contributions as income that is subject to offsets. And so, if you had employer matching or something like that, and let’s say the employer put in 50%, you put in 50%, the insurance company may offset 50% of the distribution you take from your 401k. So before you make that decision, you really need to understand, again, underscoring why it’s important to read your policy and understand what your rights and obligations are because we’ve seen some really hard circumstances surrounding that.
Another point is an appeal. We’ve seen insurance companies take different positions on this but our senses, we typically treat an offset as an adverse benefit determination that has appeal or rights associated with it. So, these claims are broken down. When we look at the spectrum of the LTD claim, we have the initial claim process. We have the administrative appeal process and we have court litigation. And if this is an ERISA-governed policy, which is typically a policy that you would get, a coverage that you’d get through your employed, you’d got to go through this administrative appeal process but you need to follow the rules. And often, if you don’t file that appeal within the timeframes required, you lose your rights to the appeal. You may not even be able to pursue claims in court. In many cases, if you get noticed that they’re applying an offset, you want to either get an appeal in within 180 days of notice of that, if you’re going to appeal it or at least get some written confirmation as to what your appeal deadlines are around that. So, you don’t want to delay on this because if you let too much time pass, you may lose your rights. May, because it depends on the wording of the plan and the circumstances. But you may lose your right to appeal. And so, if you get notice of an offset, it’s time to investigate right away. Don’t delay doing that.
And if you have questions, reach out to an experienced long-term disability lawyer. We are that. If you had some takeaways from this video, this is a complicated issue. Your policy can be complicated and applying your facts isn’t always straightforward. If the insurance company’s applying an offset, read your policy, understand it, don’t delay. You can reach out to us and we’d be happy to talk to you to see if we can help. It costs nothing to speak to us to see if we can help you. And when we do help people with these issues, we review the policy. We consider the facts carefully and we do what we can to protect your rights to make sure that you’re getting the benefits that you worked hard for. Leah, do you have anything to add?
Leah: I would just emphasize, as you said, that this can be very complicated. These LTD benefits are, obviously, very important to people who are disabled and unable to work. As I said, they should examine it carefully. Don’t just let the insurance company I say, “I’m taking this offset,” and just let it go. Make sure they’re doing it properly and accurately. And if you’re not sure, contact an experienced attorney like us to help you figure that out.
Mason: Great. Leah, thank you very much. And thank you all for tuning in today. Take care.
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