If one of your employee benefits is disability insurance, count yourself fortunate. A disability policy provides valuable coverage against the day you get seriously ill or are injured and can no longer work. The amount of coverage will vary, depending on the premium paid, either by your employer or yourself -- or both. The carrier may also reserve the right to a Social Security offset.
A disability insurance policy compensates you for a loss of earnings due to a disability. If you are sick or injured and either permanently or temporarily disabled, disability insurance will pay a percentage of what you were making before the disability began. The percentage varies but usually ranges from 60 to 80 percent. Employer-provided disability coverage is the most common form of disability insurance; the coverages and premiums are negotiated between employers and insurance carriers.
Disability insurance providers will reserve the right to offset Social Security and other benefits -- such as workers' compensation -- that you receive for your disability. This means the amount you receive from other sources will be subtracted from the amount you should have received according to the policy. It's also common for disability carriers to require that you apply for Social Security disability if your condition is permanent. The idea behind offsets is that the insurance company, and your employer, don't want to see you earning more when injured than you would have if you were still working.
The federal law known as ERISA -- short for the Employee Retirement Income Security Act -- covers employee pensions and benefits, while state law regulates insurance terms and policies. No state bars disability insurance offsets. Some states allow disability carriers to take a Social Security offset even if you haven't applied or are still waiting for approval of a claim. However, California and other states do require that offsets be taken only if you are actually receiving Social Security disability. Disability carriers may also reserve the right to offset any "auxiliary" benefits your family or dependents are receiving from Social Security or other sources.
Finding the Offset
If your employer is offering disability insurance, you should receive a summary plan description. This is supposed to be a plain-English description of the plan's benefits, as well as any offset the carrier may claim against your benefits. Most disability policies offer a minimum monthly benefit that will be paid regardless of the offset amount. But if your Social Security disability award comes with a substantial back benefit, the disability carrier may try to collect some or all of that benefit if it covers months in which you also received the private disability.
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