Disabled individuals are often forced to stop working due to their functional limitations. In such cases, it becomes important to identify an insurance policy that adequately meets the needs of the applicant. A comparison between private and government benefits can help in determining the most suitable safety net for their unique circumstances.
Government programs like Social Security Disability Insurance (SSDI) are designed to replace only a small portion of the disabled individual’s income, whereas private disability insurance can cover almost 60% of an individual’s pre-disability income.
Private disability policies also allow for more customization. There are many other differences between private and government benefits, which are discussed in detail below.
Private Disability Insurance vs. Government Benefits
Although both private disability insurance and government benefits provide protection in the event that you can’t work due to a disability, it is essential to compare the two types of benefits side by side.
Government Benefits
Government benefit programs like SSDI are available to workers who have paid Social Security taxes throughout their working years, but there are some strict criteria that applicants must meet.
On the other hand, private disability benefits can provide more leeway in benefits than traditional government disability insurance programs like SSDI.
Eligibility Requirements
In order to qualify for government benefit programs like SSDI, you must have earned a specific number of “work credits” for each year you were employed in a job that required you to pay Federal Insurance Contributions Act (FICA) taxes.
The total amount of work credits required will depend on your working years, age, and the onset of your disability.
In addition to that, you will need to meet the Social Security Administration’s criteria for “disability” in order to qualify.
This means that your medical condition must have lasted, or is expected to last, for a minimum of 12 months or result in your passing. You must also be unable to work in any alternative occupation.
Benefit Amount
The benefit amount you will get from government benefit programs like SSDI and Supplemental Security Income (SSI) is generally much less than that offered by private benefits. You will not be compensated for your full income loss but it may help with some of your fundamental living expenses.
The average monthly disability payment paid out by Social Security in 2023 is $1,827.
Chances of Denial
Recent data shows that over 70% of initial applications for government benefits are rejected. It is important to keep in mind that the process of appealing the denial might take anywhere from three months to more than three years.
Private Disability Insurance
Private disability insurance policies, as the name suggests, are available for purchase on a voluntary basis. They allow for greater customization.
Eligibility Requirements
If you have a disability that renders you unable to work, private disability insurance can help you recover your lost income. A person can get long-term disability insurance through a private insurance company or through a group disability plan that their workplace offers.
In order to be eligible, you may be required to pay into a private disability insurance policy for a particular number of years, anywhere from one year up to your typical retirement age.
Benefit Amount
Unlike government benefits, private benefits are intended to replace a substantial portion of your income, allowing you to maintain a comfortable standard of living. You might expect to receive 40 to 60 percent of your pre-disability income from private insurance policies.
Private disability insurance policies are meant to replace what claimants typically receive from their pre-disability paycheck. Unlike government benefits, private benefits generally cover enough of your income to ensure you have livable benefits.
Private disability insurance offers coverage for a set number of years, which can be as little as one year or until claimants reach retirement age.
Chances of Denial
It’s easier to get private disability insurance benefits than government benefits, but there is still a chance of your application getting rejected. It is essential to pay attention to the specific details in each policy because they often include varying definitions of disability.
What to Do if You Get Denied Government and Private Disability Insurance
If you encounter delays or denials for government benefits and/or private insurance benefits, you still have the option to file an appeal. It is important to note that the early involvement of a highly experienced disability insurance attorney can help you win a disability appeal if you have been denied benefits.
Appealing Private Disability Insurance
If your insurance company turns down your private disability insurance claim, the first thing you should do is review your policy again. The policy provides plenty of helpful information, including the appeals process.
If you do not have a copy of your policy, you should request one. If your benefits are employer-funded, get in touch with HR. If you have an individual policy, contact your insurance provider.
After reading your policy and making sure you understand what it entails, you should carefully review your denial letter. The denial letter should detail the next steps required for filing an appeal.
Appealing Government Benefits
To appeal a government insurance benefit, you can start by filing a Request for Reconsideration in response to the denial letter. However, according to the Social Security Administration’s (SSA’s) regulations, the standard time limit for filing an appeal following an SSA denial notification is 60 days.
If you don’t get benefits after the process of reconsideration, you can request a hearing in front of an Administrative Law Judge (ALJ). If your government benefits are not approved after the hearing, you can still have your case reviewed with an Appeals Council.
Cost of Private Disability Insurance vs. Cost of Government Benefits
Your budget may determine whether you opt to buy private disability insurance or rely on Social Security disability benefits alone.
The fees for private disability insurance are determined by factors such as your medical history, the duration of your benefits period, and the amount of coverage you require. These factors are often assessed on a monthly or annual basis.
For most people, policies cost between 1% and 3% of their income. In some cases, private disability insurance may be cheaper, for instance, when it is provided through a group policy.
In contrast, you won’t have to pay any additional money for your government disability benefits or any of the other government-run programs. This is because these benefits have already been paid for through Social Security taxes.
The Social Security Disability Insurance program is often the only option for those unable to afford private disability insurance. There is a high rejection rate for SSDI applications; even if you are eligible, it might take months to get coverage.
If your claim for disability benefits from Social Security is accepted, you will receive backpay for the time you spent appealing the prior decision. However, that may not alleviate the financial burden you carried while you were awaiting disability compensation.
If you have both government benefits and private disability insurance coverage, your benefits may be subject to taxes. If you only have SSDI coverage, you will only have to pay taxes on any extra income earned on top of your SSDI benefits.
For individuals, this translates into earning at least $25,000 a year, and for married couples filing jointly, it translates into earning at least $32,000 a year.
In the case of private disability insurance, if your employer covers your policy or pays any of your premiums with pretax money, your benefits will be subject to taxation. However, only the portion of your benefits equal to the amount covered will be deemed taxable.
Will My Government Benefits Reduce My Private Disability Insurance?
You may be surprised to learn that almost all private disability insurance plans have a “coordination of benefits” provision that reduces your monthly benefit by whatever amount you receive from the SSA. This includes both your benefits and any benefits your children receive as a result of your disability.
The coordination of benefits rule is meant to keep claimants from receiving an exorbitant amount and lower the cost of private insurance coverage for employers and workers.
Most private disability insurance plans require claimants to first apply for Social Security disability benefits and take their appeals all the way to the hearing or Appeals Council stage if denied.
If you do not submit an application, your private disability insurance benefits can be reduced by the amount you are estimated to receive from SSDI. Private disability insurance plans typically only deduct the initial SSDI award amount and do not account for the Social Security COLAs.
It is possible for government benefit awards to completely offset the private disability insurance benefit, bringing it down to the insurance minimum in certain cases.
Keep in mind that getting a favorable Social Security decision can take a long time. When you are waiting for your Social Security benefits, private disability insurance benefits can help cover some of your essential living expenses.
How Are Government and Private Disability Insurance Benefits Taxed?
The benefits you get from SSDI or SSI are considered taxable income. Taxes may or may not be due on private disability benefits based on whether you or your employer paid the insurance premiums. But in most cases, private disability benefits are taxed if your company pays all your premiums with pre-tax dollars.
However, if you paid your disability insurance premiums after taxes, benefits may be only partially taxed, depending on your premium amounts. So, if you get both private disability and government disability benefits, keep in mind that this can result in a reduction of your total income.
Waiting Periods for Government Benefits vs. Private Disability Insurance Benefits
In order to get government benefits, you must wait a minimum of five calendar months. For instance, if you applied for government benefits on January 1, you would not receive benefits until June 1.
The standard waiting period for private disability insurance benefits is three to six months from the date of impairment.
Government disability benefits take a long time because there is a backlog of many cases at the Social Security Administration, so it can take up to two years or more to get a favorable decision.
Private disability plans, on the other hand, are required to decide on an initial disability claim within 45 days. However, they can (and often do) ask for up to two 30-day increases for a total of 105 days.
While both government benefits and private disability insurance benefits have similar waiting periods, private disability benefits are often issued sooner than government benefits.
Working While Receiving Private Disability Insurance Benefits vs. Government Benefits
The Social Security Administration may still grant you benefits even if you return to work for a short time while your application for benefits is being processed, provided that the return to work is classified as “unsuccessful” or “sympathetic employment.”
Under the Social Security Administration’s “Ticket to Work Program,” you can return to work without any earning limits and still get benefits for a period of 9 months in a 60-month period. If your disability benefits get discontinued due to income increases following the Ticket to Work period, you can also request expedited reinstatement of your government benefits if you become disabled again.
Remember to inform the Social Security Administration before going back to work so you can avoid an overpayment, or worse, face fraud allegations and possible criminal prosecution.
Insurance companies that provide private disability plans sometimes offer vocational rehabilitation services and temporary high monthly compensation to claimants who return to work, whether part-time or full-time.
Your private disability insurance plan may have a “recurrent disability” provision that allows you to get your benefits reinstated if you become disabled again less than six months after going back to work full-time.
If your private disability plan is employer-funded, you may lose your eligibility to get your private disability insurance payments reinstated if you join another company. Before returning to work, make sure you thoroughly read your policy to understand your rights.
Conclusion
Understanding the differences between private disability insurance and government benefits is crucial for individuals seeking financial support during periods of disability. A comprehensive knowledge of various disability programs can guide individuals toward accessing more suitable benefits.
