The Social Security Disability Insurance program, or SSDI, had a large influence in the private disability insurance world. From helping determine the diagnosis of an insured to the amount of an insured’s benefit check each month, it is almost impossible to deal with private insurance without worrying about Social Security. This is why Social Security questions are some of the most common inquiries that come into our office. In the second blog in this series, we are going to discuss the different ways that SSDI payments have on a private insurance claim and the proper ways for an insured to handle problems.
Under most LTD insurance policies, Social Security payments are deducted or offset from the amount of monthly benefits the insured receives. For example, if the insured’s policy called for $3,000 per month in benefit payments, and they were receiving $1,000 per month in Social Security payments, the insurance company would only send a check for $2,000 per month ($3,000 offset by $1,000). This is the general rule, but there are exceptions. On some types of individual policies, it is possible to purchase a rider that enables the insured to receive both Social Security benefits and their full amount of private disability insurance benefits.
Although both Social Security and private insurance combined should add up to your benefit amount, it is usually not that simple. Since almost every working American is eligible for SSDI coverage, there are many more people eligible for SSDI benefits than have their own private disability insurance. It follows that Social Security has a huge backlog of claims, and SSDI claims generally take much longer to get approved than claims submitted to an insurance company. Since benefits from the insurance company are offset by Social Security benefits, the insurance company pays the full monthly benefits under the policy language, since there are no Social Security payments yet. To use our previous example, if the insured’s policy called for $3,000 in monthly benefits and Social Security benefits hadn’t been approved or paid yet, the disability insurance company would pay the whole $3,000 per month.
However – and this is HUGE – when Social Security payments are finally approved, the insured will receive all the SSDI benefits they are owed, retroactive to the date the insured became disabled. Staying with the same example, if 2 years had elapsed from the date of disability until SSDI benefit payments were made by Social Security, then Social Security would send a check for $24,000 (24 months x $1,000 per month). The timing of these payments don’t change the policy contract with the disability insurance company. Now that the insured has been paid Social Security benefits retroactively, the insurance company overpaid the benefits for 2 years by $1,000 per month…and they will want all of that money back! The insured is obligated to turn over their SSDI benefits, both the retroactive payment as well as the current benefits, to the insurance company. People see that their disability benefits are taxable as well as their SSDI benefits are taxable income, which can seem like double taxation.
This is where the process can get a bit confusing to many people. The tax code provides that you don’t have to pay taxes on benefits you don’t receive. So, if all of the SSDI benefits were reimbursed to the insurance company, those SSDI benefits weren’t actually received. Another way to think about our above example is that the insurance company essentially loaned the insured $24,000 that the insured has to repay with the retroactive SSDI award. Between Social Security and disability insurance benefits, the insured should have received a total of $72,000 over the two years: $24,000 from Social Security and $48,000 from the private disability insurer. But the insurance company paid the entire $72,000 over those 24 months. Once Social Security eventually caught up on their part and paid the retroactive award, the insurance company expects those payments back.
Social Security issues 1099 forms for SSDI benefits payments, so those amounts have to be accounted for on the income tax return. There are two ways to account for these payments in order to avoid double taxes on the SSDI benefits that were repaid to the insurance company. The insured can amend the prior year’s tax returns and reduce the reported income from the insurance company and increase the Social Security benefits attributable to and reported in that year (i.e., $12,000 per year for the two prior years in our example). A second option involves calculating income tax credits on a pro-forma basis on the current year’s tax return for the income attributable to prior years. For either approach, I strongly recommend the help of a tax attorney or CPA, or a claims advocate who has experience dealing with the financial issues in disability claims.
Since we are on the topic of Social Security in today’s blog, I would like to mention a quick tip that is often overlooked when filing a Social Security claim. The disability insurance company may offer to provide resources to help apply for or appeal your Social Security claim – but be wary of this offer. If you have a disability that the insurance company could construe that would limit or reduce your benefits, it may not be in your best interest to use their “help.” If the insurance company is considering your claim as a physical disability but their lawyers have Social Security consider it to be a mental or nervous or a self-reported condition, the insurance company may try to leverage that decision and apply a 12 or 24 month limit for such types of claims.
The next and final chapter of this series is going to focus on different types of disability insurance coverages. Until then, if you have any questions about this blog or anything else to do with disability insurance, please call us at (855) 828-4100 or visit our website for a free consultation. If you missed part 1 of our Disability Insurance Financials series, you can find it here. As always, please share your experiences or stories in the comments section below.