Long Term Disability Benefits and Social Security Disability Offset
Long Term Disability (LTD) insurance companies can reduce your benefits and charge you with “overpayment” if you receive Social Security benefits. It is important to read your policy to see if it contains an “offset” provision.
If you are receiving LTD insurance benefits under an individual or employer provided group plan, the LTD insurance company will most likely require you to file for Social Security Disability benefits if you are eligible. Most LTD policies will contain an offset clause, allowing the insurance company to reduce your LTD benefits by the amount you receive from Social Security.
For example, let’s say you are supposed to get $1,000 in LTD payments per month. You apply for Social Security, and you are approved for $600 in payments per month. In the end, you will still get $1,000 per month, but $600 will come from Social Security, and only $400 will come from your LTD policy. The LTD benefits are “offset” dollar for dollar by any SS benefits paid.
This seems unfair, and perhaps it is. But the insurance companies argue this helps keep monthly premiums lower and they would increase if they weren’t allowed to offset.
Social Security can create an LTD Overpayment
Social Security (SS) disability payments are rarely approved quickly. You can’t even apply right away, and when you can apply, it takes months to receive a decision. This process can take up to a year or longer.
Even though it may be a year or more before you receive SS benefits, you are entitled to benefits from the very beginning. So what happens is, when you are finally approved, the government will send you a lump sum check for your past due benefits.
The offset provision in your policy means your LTD insurance company is entitled to most, if not all of this past due lump sum payment. The rationale is the insurance company overpaid you for the months you were receiving LTD benefits, since the amount should be offset by the past due SS benefits that are now being paid to you.
You will likely get a “Notice of Award” from the insurance company, where they calculate the amount of overpayment. Check their math, because they are often wrong! If you paid an attorney to help you obtain the SS benefits, there will be a reduction in the amount you owe. An offset of the offset, so to speak
Other offsets
Some LTD policies will contain offset provisions for other types of payments, such as state short term disability benefits, workers compensation benefits, and even 3rd party settlements such as personal injury awards. It is always a good idea to check your policy at the beginning of the claims process so you understand what your obligations and rights are.