Private Disability Insurance: Know the Coverage Details

by Chambliss, Bahner & Stophel, P.C.

Many employers provide short- and long-term disability insurance for their employees as an important part of their benefits packages. These policies often make an enormous difference in an employee's quality of life if she is injured or becomes sick unexpectedly. But if an employee needs to actually use the disability insurance that she is entitled to, she may run into unforeseen roadblocks.

When an employee becomes disabled, disability insurance policies will typically pay the employee a portion of her previous salary for a designated period. Short-term disability insurance policies are designed for immediate emergency use and may actually provide a full salary; a common example is when a pregnant woman requires bed rest and cannot work up through her delivery date. Long-term disability policies take effect only when the short-term policies run out, and they are designed to pay benefits to an employee who will be unable to work for the foreseeable future, usually because of a chronic illness or a serious, unexpected injury. While long-term disability policies represent an opportunity for a worker with disabilities to provide for her family, they don't always operate as expected:

How "disability" is defined. Disability insurance providers have different definitions of a qualifying "disability" that entitles the employee to benefits. Some policies state that a person is not considered disabled until she meets the federal definition of "disabled," which says that a person is disabled only when she has a medically determinable physical or mental impairment that results in the inability to do any substantial gainful activity and that can be expected to last for longer than one year or result in death. Other policies may be more lenient, providing coverage even though the disabling condition may only last eight or ten months.

The effect of other income sources. Many long-term disability insurance policies actually require beneficiaries to apply for government disability benefits in order to offset the cost of disability insurance. If a claimant ends up qualifying for federal benefits, like Social Security Disability Insurance (SSDI), then the amount of the government benefit that the claimant receives may be deducted from the private insurance benefit that he receives. The result of this policy is that the person with the disability is stuck with a maximum benefit that is only as high as his SSDI payment or his private disability insurance benefit, whichever is larger. Some policies may take an employee's other sources of income into account and reduce benefits accordingly. Therefore, it pays to look carefully at a disability insurance policy to determine whether you will be able to increase your income from other sources without effecting your private insurance payment.

How appeals are handled. Because private disability insurance policies are not government benefits, they do not have a standard system in place to deal with appeals by claimants who do not initially obtain coverage or who have had their coverage terminated. In most cases, an appeal begins by filing a letter with the insurance company demanding a review of its disability determination. Most of these appeals are handled by internal review boards and the person with a disability must follow an appeals process that was created by the insurance company and defined in the insurance policy. If a policyholder's internal appeal is unsuccessful, then he will often have to file a civil lawsuit for breach of contract in order to collect his benefits. (Most plans offered through work have to follow federal regulations that define the stages of the appeals process.)

Because every private disability insurance policy is unique (and very complicated), it pays to have an attorney review your policy prior to accepting any private disability benefits. As with any other contractual arrangement, a little additional knowledge could mean the difference between receiving a substantial disability benefit and losing out on an important source of income.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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