Disability Insurance Planning
Types of Insurance and How to Protect Yourself
Types of Insurance and How to Protect Yourself
If you have a diagnosis of IH or a related sleep disorder, the best time to prepare for a possible disability is while you are still working full-time. All too often, people start to experience severe symptoms and leave their job or reduce their hours before establishing coverage and qualifying for benefits which may provide critical income and health insurance coverage. This page details the most common disability insurance benefits available to ensure that you are financially protected should you become unable to work: short-term disability, long-term disability and Social Security disability.
Short-term disability is typically an employer-sponsored benefit. Generally, employers will pay the premium for this benefit should you go out of work for a short period of time. You may also have the option of paying directly through your employer to receive this benefit. Short-term disability will replace a portion of your paycheck for a short period of time. It typically comes with a waiting period of 1-30 days and then benefits may be available for three to six months. The benefit amount is usually up to 60% of your income. While being out of work on short-term disability, you will be able to retain health insurance coverage. In order to receive short-term disability benefits, you will need support from your treating physician, such as a form that certifies that you are unable to work due to your condition. Your human resources department can provide you with a copy of your policy and specific information as to what is required in order to receive short-term disability benefits.
If your employer does not offer short-term disability benefits, you may be able to purchase coverage through a private company like AFLAC. Unlike employer-provided short-term disability, a private company will require you to qualify on the basis of your health. If you already have an IH diagnosis, the private policy may not cover you for this condition. In general, short-term disability policies are designed to provide financial assistance for short-term absence from work due to accidents, complications in pregnancy, etc. For chronic conditions leading to long-term or potentially permanent absence from work, long-term disability coverage is likely to be the better investment. Note that it is generally wise to save an emergency fund to cover your living expenses for 6 or more months; this emergency fund can also serve as self-insurance for short-term disability.
The idea behind long-term disability (LTD) plans is to replace a portion of your paycheck for a longer period of time. LTD benefits are often available through employer-sponsored plans, in which your employer may pay for some or all of your premium. LTD policies may also be purchased on the private market, and there are some significant differences between these two, which we’ll discuss below. (Note that for both types of policy, if your premiums are paid with pre-tax dollars, any future benefits will be taxed; if your premiums are paid with post-tax dollars, any future benefits will be tax free.) Since LTD benefits typically pay a percentage of current income, it may be wise for students to consider working full-time instead of continuing school, in order to solidify their LTD benefits, whether through an employer, through private insurance, or both. (Note that social security disability also has work requirements to qualify. See below.)
Each policy’s definition of disability and terms may vary, and it is very important to be familiar with your particular policy. There are typically two types of policies: own occupation policy and any occupation policy. The “own occupation” policy defines disability as the inability to work at your regular occupation. The “any occupation” policy typically defines disability as the inability to work at any occupation. Most policies adopt a hybrid of the two policies, which may include “own occupation” language for the first two years, and then a change to the “any occupation” language for the duration of the claim. Private LTD policies often allow for additional policy riders that may be important to consider, such as partial disability (supplementing your income if you are no longer able to work full-time but could still work part-time), longer “own occupation” time periods, etc. The waiting period typically begins after entitlement to short-term disability ends, which is usually 3-6 months.
When purchasing a private LTD policy, you must qualify on the basis of your health, so it is a good idea to purchase your policy when your health and treatment are optimized. (This qualification is usually not required for employer-sponsored plans.) If you already have a diagnosis of idiopathic hypersomnia (IH) or a related sleep disorder, then it is possible that your private LTD policy will exclude that disorder. Even if that is the case, you may still wish to consider purchasing the policy, because there is a significant risk of developing other disabling conditions during the course of your entire lifetime. Musculoskeletal disorders, cancer, and pregnancy are the most common 3 categories for LTD claims. (Read more HERE.) “A 35-year-old has a 50% chance of a disability lasting 90 days or longer before they reach age 65, with 1 in 7 having a disability that lasts 5 years or longer in their lifetime.” (Read more HERE.)
Note that if you apply for LTD insurance and are denied, you will likely not be approved in the future. (When applying for LTD, you will always be asked if you have ever been denied in the past.) Therefore, it may be wise to negotiate for even a partial approval, even if you’ve already decided you don’t want to purchase the policy for whatever reason.
Private LTD also differs from employer-sponsored LTD in that private policies are portable when you change jobs, including moving to self-employment or a smaller employer that may not provide LTD. Private LTD may also cover a portion of your income when you are between jobs. In addition, private LTD is not regulated by the ERISA* laws that govern employer-sponsored LTD. The ERISA laws strongly favor the insurors and have the effect of generally making it more difficult to receive your benefits from an employer-sponsored policy than from a private policy. If you become disabled, having a private LTD policy can mean the difference between waiting weeks/months for your benefits and waiting years for your benefits as you go through the lengthy appeals and possibly legal battles that are more likely with ERISA-governed policies and social security disability. Therefore, if you can qualify for and afford private LTD, it may be very wise to carry it instead of employer-sponsored LTD. For the most comprehensive coverage, purchase both if you can. (Read more HERE.)
In order to receive long-term disability benefits, it is important that you have the support of your treating doctor, as the insurance company typically requires ongoing reports from the treating physician. Many long-term disability policies require that you apply for Social Security disability benefits as well, and will offset the amount of long-term disability paid by the amount of Social Security disability benefits for which you are eligible. The insurance company may also request an Independent Medical Examination (IME) to assess your medical condition, including the treatment that you need, whether your condition is expected to be permanent, and what impact your condition may have on the ability to work. It is also important to know that often insurance companies will employ the services of a private investigator to collect additional information (including surveillance) on your ability to perform daily activities, such as driving and grocery shopping.
Once you realize that your illness is significantly interfering with your ability to work and leading to your disability (as defined by your policies), it is important that you do not wait to file. If you wait to apply, you may already be working fewer hours, making less money, and therefore having reduced benefits (which are a percentage of your income) because of your disabling illness. Or your employer may already be disciplining you and planning to terminate your employment, after which pursuing LTD through your employer-sponsored plan can be substantially more difficult.
*ERISA: Employee Retirement Income Security Act, which governs most employer-funded group insurance plans
Social Security disability is a federal program which offers a monetary benefit and health insurance through two programs: Disability Insurance Benefits program (also known as “DIB” or “SSDIB”) and Supplemental Security Insurance (also known as “SSI”). The DIB program offers a monthly check and Medicare health insurance to workers who have paid into the system through either FICA taxes or SECA (Self-Employed Contributions Act) taxes. The monthly benefit amount for DIB will vary from person to person, as the Social Security Administration determines the DIB amount based upon how much money you have paid into the system over your lifetime. To find out how much your benefit amount would be, visit www.ssa.gov and log in to mysocialsecurity. The SSA will determine your onset date (the date that your disability began), and there is a 5-month waiting period from that date before your entitlement to the monthly check begins. By qualifying for the DIB program, you will automatically be eligible for Medicare after a 29-month waiting period.
You must be insured under Social Security in order to receive Social Security Disability benefits. As you work and pay Social Security taxes, you earn quarters of coverage that qualify you for future disability benefits. Quarters of coverage are based on how much you make. In 2021, you receive one quarter of coverage per $1,470 of earnings. To see the earnings required each calendar year to earn one quarter of coverage, click here. However, you can earn no more than four quarters of coverage per year, regardless of the amount of your earnings. For example, if you earn $6,000 in one month in 2021, then you have earned your four quarters of coverage for that year. Each year the amount of earnings needed to secure a Social Security quarter of coverage changes, and generally more earnings are needed to secure a quarter of coverage. Quarters remain on your government record, even during periods of unemployment.
To receive Social Security Disability benefits, you must have earned at least 20 quarters of coverage, or worked for five out of the last ten years and paid FICA or SECA taxes. There are some exceptions to this rule for younger workers who are under the age of 31. To be fully insured for purposes of disability benefits for a younger worker, you must have earned at least one quarter of coverage each year between the time you attained age 21 and the year you become disabled, and you must have earned at least six quarters of coverage by the year you become disabled. For the official Social Security Administration requirements, click here.
It is important that you do not wait to file for disability because quarters of coverage can expire. Generally speaking, if you have worked five out of the last ten years, your quarters will expire five years from the time that you stopped working. For example, if you worked from 2006 – 2010 and earned four quarters of coverage each year, then your quarters of coverage will expire on December 31, 2015. In order to be found disabled, you have to prove that you became disabled on or before December 31, 2015. If you wait to apply for disability, then it may be more difficult to prove that you became disabled before your quarters of coverage expired.
There is another situation where entitlement to DIB comes into play. In certain circumstances, the DIB program may also be available to the disabled adult children of a worker who is either eligible for DIB, retired, or deceased. This benefit is available even even if the disabled adult child has never worked. For more information, see the SSA web page on Disability Benefits: How You Qualify and look for the section on “Adults Disabled Before Age 22”. See also our SomnusNooze article on this topic.
The Supplemental Security Income (SSI) program offers a monthly check and Medicaid health insurance to adults who have not paid into the system (or have not paid enough into the system) as well as children. This program is income and asset sensitive, which means that you must prove that you have limited financial resources in order to qualify. The monthly benefit amount for SSI may vary from person to person, as the SSA may reduce the amount if you are receiving financial support elsewhere (e.g., living with someone and not paying rent; receiving alimony, child support, other disability payments, pensions, and/or earnings from wages). The maximum benefit payable in 2021 is approximately $794 per month, but a few states offer supplemental income in addition to the SSI maximum. Unlike the DIB program, SSI does not require a waiting period to receive the monthly check or Medicaid—you are eligible beginning the next month following your onset date. For more information, see the SSA web page on Supplemental Security Income.