Income Replacement Policies

Short Term/Long Term Disability Basics

  • Income replacement policies do exactly as their name suggests: they replace a person’s income when she or he is unable to work. Bear in mind that the amount of income replaced is typically limited to a maximum percentage of your earnings. There is also a cap or maximum amount of income on every policy based on what you purchased and any adjustments (e.g. for inflation) provided in the policy. So while these policies are generally discussed as if they “replace” income, they do not provide the same income.
  • These policies are contractual in nature, as opposed to statutory.
  • The nature of the benefit and the scope of a person’s rights to enjoy the benefit are set by the terms of the policy. This is important to understand because the details of the policy will govern what you are entities to and what steps you must take to secure that benefit. As soon as you are diagnosed read the entire policy and be certain you understand what steps you must take. If you can afford an attorney, it is worthwhile to have an attorney review the policy with you so that you fully understand it. If the cost of the attorney is a concern you should at minimum meet the agent who sold you the policy and enlist his or her help in understanding the policy.
  • Typically, a policy will provide for the payment of a specified percentage of the person’s income (perhaps 60-70%), upon the occurrence of a triggering event (such as the onset of disability) for a specified period of years (typically until 62, 65 or retirement age) provided that the individual remains disabled as defined by the policy. While historically most people had retired at age 65, these age limitations were reasonable. For many people now, they may not be for many reasons. Social Security benefits may be deferred as a result of changes in the law or your endeavoring to obtain a greater benefit. In past years more generous employee pension plans were more common than now. Also, the idea of retiring at age 65 is not realistic for many people. For example, 82% of working Americans over 50 say it is at least somewhat likely they will work for pay in retirement. If PD prevents you from working as long as expected, relying on a disability policy that will end at age 65 when financially you would have been among the majority continuing to work into retirement years will not suffice financially to meet your needs. This is vitally important to understand now because, even for those with good disability insurance, it may not suffice.
  • Income replacement policies can be privately purchased (usually only prior to the onset of disability) or provided as an employment benefit. Whatever type of policy you have, review it in detail as soon as you are diagnosed. Identify what reporting obligations you might have to the insurance company and when they must be given. Do not risk inadvertently overlooking your obligations under the policy. If you have a work provided policy evaluate what options you might have if you have to cease working at some point. Is the policy portable? Can you convert it into a private policy?
  • Particularly in the latter case, they may be structured to provide a short-term benefit for an initial period of time (such as 100% income replacement for 6 months), followed by a different benefit for the duration of the coverage (such as 70% until retirement).
  • Hence the terms short term disability insurance and long term disability insurance.

The Long Term Disability Definition of “Disability”

  • A key question regarding income replacement policies is what constitutes a triggering event entitling the covered person to payment under the policy in question.
  • In other words, what is the definition of “disability” that triggers payment?
  • Because income replacement policies are contractual, the definition of “disability” can vary from contract to contract. You might find a number of different types of definitions of key terms in the policy. Some key terms are actually defined in the policy. In that case the policy definitions will control, not what you might consider a common English definition of the term. Many policies will refer to the tax or other laws to provide definitions. For example, the policy might pay you a certain percentage of your gross income as defined in 26 U.S. Code Section 61. This might be referred to as Section 61 of the Internal Revenue Code. This can be advantageous to everyone as referring to a tax code can often provide considerable detail to understand exactly what the term means. However, this will make it more complex and difficult for you to evaluate and understand each term as you will have to do a bit of sleuthing to understand the definition. There will also be some important words or phrases that are not defined in the policy or by reference to an outside law. This might occur because the attorneys drafting the language of the policy might have simply not realized there may be an uncertainty or lack of clarity with the term used. However, if your circumstances are unusual, it might be tough to apply such a term. To really get a handle on your policy, you will have to struggle through this gauntlet. This is precisely why is strongly recommended that you review all of this as soon as you are diagnosed, before disease progression or other challenges of living with PD take a toll.
  • It is important to know what your contract says in order to know if and when you might be paid.
  • While the definition of “disability” is contract specific, one thing is likely: it will be a different definition than the one used in the employment portion of the ADA.
  • The essential claim for benefits under short term or long term disability policies is that you cannot do your job or work at all (as opposed to an ADA request for job accommodation so you can stay on the job and want to do so).
  • The most generous income replacement policies will be tied to the standard of whether you can perform your job, or one like it, suitable for your training and experience. These are referred to as “own occupation” policies. They are less commonly written and typically more expensive to purchase.
  • In other words, you will get paid if you can’t do your specific job (as defined in the policy), even if you can still work at a different job or occupation.
  • An example might be a physician who develops Parkinson’s. If s/he has such a policy, then upon becoming unable to do his/her job, payment would be forthcoming – even if the physician could do other work, perhaps such as lecturing or doing manual labor. Be very careful to understand exactly what this means under the terms of your policy. For example, if you work as a surgeon but cannot perform surgery but can perform office visits in your practice, your policy may still view that as performing work in the same occupation. The nuances of the definitions are critical.
  • Other policies might adopt a stricter standard: not whether you can do your job, but whether you can work, i.e., can you do any job? Obviously, this will make collecting on such policies more difficult. This standard may be akin to the one used by Social Security. Again, bear in mind that every policy is different. There is no “standard“ policy. Even policies issued by the same insurance company will change over time. You must study and understand your own specific policy.
    Tip: Make a photocopy of your policy. Highlight key terms in yellow. Highlight the reporting steps you have to take in another color and the requirements you must meet to collect in a third color. Then read the entire policy from beginning to and making notes in the margin. Then go back and read it again and try to answer the open margin notes. Often, the manner in which policies are written will require reading the entire policy because later provisions may provide definitions require for earlier provisions, etc. If there is a reference to an outside source, such as a tax law definition, google that term or phrase and print it on a page to insert into the policy so when you read the policy in the future you will have that language handy. It is only by reading and studying the policy many times you will begin to pick up all the nuances.
  • It is critical to know if your policy retains the same standard for “disability” over time. In many cases, an income replacement policy may combine the two approaches, typically applying the easier to meet “can you do your job” standard for an initial period (e.g. 2 years) then switching to the more difficult to meet “can you work” standard. For People with Parkinson’s, this can make for a difficult planning process, since being awarded long term disability for the initial period is by no means a guarantee that long term disability benefits will continue thereafter. As suggested above, it is very important that you understand all your reporting obligations under the policy.
    Tip: Note in your calendar the dates of each new test or reporting obligation. So if your policy requires application of a different definition of disability after two years calendar that date and perhaps a reminder two months earlier to begin preparing the documentation to demonstrate to the insurance company that you meet the new test.
  • Keep in mind that the ADA’s notion of “the ameliorative effects of mitigating measures” does not carry over in the context of income replacement, unless of course it is part of the LONG TERM DISABILITY contract. Therefore, taking steps to get better (meds, surgery, etc.) could adversely affect your entitlement to the benefits under your policy.

Content for this section provided by Mark Rubin, J.D. and Martin M. Shenkman, CPA, MBA, PFS, AEP, JD.


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