The letter finally arrived from the insurance company
letting you know you will begin receiving monthly disability benefit payments. A week or so later, a check arrives in the
mail. The check is in an amount less
than your normal paycheck. You knew
disability benefits were only a percentage of your pre-disability income, so
this is not surprising. You deposit the
check, assuming the insurance company has correctly calculated what you are
entitled to receive. Should you be doing
more to check the amount of the payment?
How the insurance company or plan administrator
interprets your disability insurance policy or plan to create a formula to
calculate your monthly benefit amount can make a significant difference in the
amount of benefits you will receive. The
inputs that determine your monthly benefit are generally: your pre-disability income,
the benefit percentage, and your offsets. But the insurance company decides, based on
the language in your policy, what is considered pre-disability income and what
is an offset. Moreover, the insurance
company/plan administrator decides how these calculations are done and in what
order.
What is the
benefit percentage? Most
policies and plans provide for a disability benefit payment that is a
percentage of pre-disability income.
What percentage is used depends on the policy/plan language and what
elections you made at the time you enrolled in the plan or signed up for the
insurance. Always double-check that the
insurer is applying the correct percentage.
For example, if your policy provides a basic benefit of 50% and an
optional additional benefit of 65%, make sure that you get paid based on the
higher percentage if you elected it and paid premiums for it.
What is “pre-disability
income”? The next step is to define your pre-disability income because
the benefit is going to be a percentage of that amount.
For
many people, calculating pre-disability income is simple. It is the employee’s hourly wage or annual
salary. But for some people, how to calculate
pre-disability income is less clear. For
example, with a salesperson, are his/her commissions “income” or is “income”
only the hourly base wage? Likewise, for
a server in a restaurant, are tips “income?” What about a doctor who teaches a class in
addition to his/her clinical practice, is the money gained from teaching used
to calculate “income?” What about
bonuses? Whether or not these things are
considered as part of pre-disability income could dramatically impact the
amount of disability benefits.
What are “offsets”?
Disability benefit payments will usually be reduced by income the individual
receives from other sources while disabled. Common examples of this would be Social
Security Disability Insurance benefits received by the individual or his/her
dependents, disability benefits from individual policies, or pension benefits.
Your
disability policy defines what income sources are considered “offsets,” and whether
the amount you receive will be reduced by these “offsets.” Sometimes it is unclear whether something you
have received will be considered an offset. For example, if you were disabled because of a
car accident and you received money from a lawsuit based on the car accident,
is that money an offset to your disability benefit payments? What if you had to pay an attorney to
represent you in the lawsuit, will your disability benefit only be offset by
the amount you actually received from the lawsuit or will the attorney’s fee
also be an offset?
The order of operations
is important. The “order of operations” – the order
in which these calculations are done-- also impacts your benefit amount. For example, if your policy increases your
monthly benefit over time to account for inflation (a cost of living
adjustment), is that adjustment applied to your gross benefit (before offsets are applied) or to your net benefit (after offsets are deducted)?
Over time, this can cause a dramatic
difference in the amount of your monthly disability benefit.
The point is…
These are some decisions that are made by the insurance company, based on the
language in the policy, as to how your monthly benefit is calculated. When you begin receiving benefits, if you have
any questions about how your benefit was calculated you can ask the insurance
company for an explanation of how it calculated your monthly benefit amount. If you disagree with how the benefit was
calculated, you may be able to appeal to the insurance company and explain why
your benefit should be calculated differently. If you do not raise a concern about how your
benefit was calculated when you first begin receiving benefits, you might waive
this objection and be prevented from disputing the calculations at a later
date.
Contact
an attorney specializing in employee benefits and ERISA law if you have
questions about whether your benefit was calculated correctly based on the
language in your policy.
