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.