Chapter 5 — Disability Benefit Sources

Social Security is the primary federal system providing disability income benefits. However, it is difficult to qualify for — the rejection rate for Social Security disability income benefits typically ranges between 60% and 70%, driven by its strict definition of disability.

Social Security defines disability as the individual’s inability to engage in any substantial gainful activity. To receive benefits, the individual must:

• Be unable to engage in any substantial or gainful work for at least 5 months before filing a claim, and
• Have a disability that has lasted or is expected to last at least 12 months, or be expected to result in death.

Additionally, the individual must have worked in a covered occupation with sufficient work history to be “fully insured.” The amount of benefits depends on the individual’s age, prior earnings (AIME — Average Indexed Monthly Earnings), and family status.

Several groups of employees are not covered under Social Security:

• Federal employees covered under a separate federal plan
• Police covered under municipal plans
• Railroad employees covered under the Railroad Retirement Act

Provides two types of disability annuities for railroad employees with at least 10 years of service:

• Occupational disability annuity: Applies if disability prevents work in the employee’s regular railroad occupation. Requires not having attained retirement age, a current connection with the railroad industry, and either 20 years of service or age 60 with 10 years of service.
• Total disability annuity: Applies if disability prevents work in any regular employment. Requires being under retirement age with at least 10 years of service.

Both require a five-month waiting period before payments can begin. Benefits vary significantly based on months of service and earnings credits.

Workers Compensation is the oldest social insurance program, providing benefits for job-related injuries and illnesses. It is normally a state program, although certain workers whose jobs cross state boundaries (seamen, railroad workers, federal employees) fall under federal Workers Compensation laws.

Workers Compensation provides both cash payments and medical/hospital services. Benefits may be:

• Scheduled — a predetermined amount based on the percentage of loss of use and body part affected (arms, hands, fingers, legs, feet, toes, eyes, ears, teeth).
• Non-scheduled — benefits for injuries to parts of the body not covered by the scheduled loss table, based on a percentage of the maximum weekly benefit determined by the extent of disability.

Workers Compensation is required in all states, but benefits vary significantly by jurisdiction.

These programs provide short-term financial assistance for disabilities occurring off the job. Maximum benefit periods are limited to 26 weeks (6 months) following a 7-day waiting period. Four characteristics shared by all programs:

• Coverage is partly financed by employee contributions.
• Program benefits are coordinated with other benefits the recipient is eligible for.
• The individual must have a qualifying work record to receive benefits.
• Coverage is short-term in nature.

Benefits vary widely by state, but may be as much as two-thirds of the recipient’s average weekly salary up to a stated maximum. Non-occupational disability benefits are coordinated with other benefits — for example, in New York, private salary continuation plans may disqualify a worker from state non-occupational benefits.

Government programs provide a safety net but rarely replace income adequately. The most comprehensive disability benefits come from the private sector, primarily through employer-provided plans.

The most common employer-provided disability plans. Principal advantages over individual plans:

• Generally lower cost
• Evidence of insurability usually not required

Group plans have participation requirements to avoid adverse selection. Contributory plans (employer and employee share cost) require 75% employee participation; noncontributory plans (fully employer-paid) require 100% participation.

Three benefit schedule types are common:

• Flat benefit: Everyone receives the same benefit amount.
• Earnings schedule: Benefit is a percentage of earnings (e.g., 60% of salary).
• Occupation class schedule: Benefits tied to position (e.g., officers get 60% to age 65; others get 50% for 2 years).

Maximum benefits are generally no more than two-thirds of regular wages to preserve return-to-work incentives.

Short-term disability: elimination periods of 0–30 days; benefit periods of 13, 26, or 52 weeks.

Long-term disability: elimination periods of 30 days to 6 months or longer; benefit periods of 5 years, to age 65, or for lifetime.

A common employer approach: short-term coverage of 26 weeks with a 7-day elimination period for all employees, plus long-term coverage with a to-age-65 benefit and 6-month elimination period for salaried employees.

Franchise insurance addresses minimum group size requirements for small businesses. Each insured receives an individual policy rather than a group certificate, and members may make some coverage choices. Evidence of insurability is generally required — a key difference from true group coverage.

Association plans cover members of professional or trade associations (e.g., the American Psychiatric Association). Individual contracts may or may not be issued; premiums are typically remitted directly to the insurer. Advantages include lower initial premiums; disadvantages include the requirement that coverage may be canceled for the entire group and benefits require the insured to be a member in good standing.

An employer purchases individual disability income policies for selected employees and pays the premiums. Often called a sick pay or salary continuation plan, these are typically designed for key executives rather than all employees. Benefits are normally paid directly to the insured employee in the event of disability.

Disability income benefits come from both governmental and non-governmental sources. Social Security is the primary federal source but has a high rejection rate due to its strict “substantial gainful activity” definition. All states provide Workers Compensation for job-related disabilities, and seven jurisdictions provide non-occupational disability benefits for off-the-job disabilities.

The most adequate disability income protection comes from the private sector, through true group plans, franchise or association plans, or individually purchased sick-pay plans. Only private disability insurance — particularly individual policies — can provide truly comprehensive and portable income replacement.