There is a lot of confusion about Social Security Disability Insurance (SSDI) and private disability insurance, with some wrongfully assuming that both are the same. So, how does one differentiate between the two?
It’s simple: SSDI is a disability benefits program provided by the federal government, whereas private disability insurance is a contract between an insurance carrier and the insured. Private disability insurance also generally has less stringent definitions of disability than SSDI.
Read below to find out more about the differences between SSDI and private disability insurance and which one you should opt for.
SSDI vs. Private Disability Insurance Differences
Social Security Disability Insurance
There are more than 8 million people receiving disability benefits from the Social Security Administration (SSA) out of a total workforce of 150 million. Social Security Disability Insurance benefits are available to anyone who has worked and paid into the Social Security system for a long enough period of time.
On average, a disabled beneficiary receives $1,148 per month in benefits, which amounts to $13,776 per year. To receive benefits, applicants must prove they are disabled according to Social Security’s stringent guidelines.
Those applying for SSDI must provide evidence that they:
- Are no longer able to perform the duties of their previous job;
- Are not capable of adjusting to new work due to their disability; and
- Have been or will be unable to go back to work for at least one year due to their disability.
You cannot qualify for SSDI benefits if your disability is temporary or partial. In addition, even if you meet all the requirements for Social Security disability benefits, most likely you won’t receive benefits until after the five-month waiting period.
If you have a condition that Social Security deems severe enough, such as blindness, you won’t be required to provide evidence that you are unable to work in order to receive benefits from the program.
Private Disability Insurance
About one-third of working individuals are covered by their employer’s disability insurance policy. Many people, however, opt to buy private disability insurance on their own, either as a substitute for or in addition to their employer-provided coverage.
Even though the specifics of each policy may differ greatly, private disability insurance often has some benefits over Social Security Disability Insurance. The main advantage is that private disability plans have broader definitions of disability.
While the SSA requires people to demonstrate total disability in order to qualify for benefits, private disability insurance will often pay out benefits without needing such evidence.
Although the definitions of disability in private disability insurance plans vary from each other, the following three are the most common:
- The “own occupation” coverage protects policyholders in the event that they become disabled and are unable to continue working in the role that they currently hold.
- “Own occupation” coverage with time limits protects policyholders in the event that they are unable to perform their occupational duties for a temporary period of time. Policies of this type often include a “Change in Definition” provision under which, after a predetermined period of time, the criterion shifts from “own occupation” to “any occupation.” This usually happens after one, two, or five years.
- “Any occupation” coverage defines disability as the inability to perform any job. This definition is much more stringent and is more in line with SSDI’s.
A surgeon who suffers an injury to their hands would meet the criteria for disability under the first two definitions. They would be eligible for benefits to make up for the lost income without having to prove that they are completely and totally unable to work.
One additional benefit of private insurance is that, in comparison to Social Security Disability Insurance, it may be able to replace a larger portion of an individual’s lost income.
The amount of Social Security Disability Insurance benefits you are eligible to receive is determined by your lifetime earnings average, and you cannot receive more than $3,627 per month in 2023 and no more than $3,822 per month in 2024.
Privately insured people might be eligible for more than this. Most policies pay at least 70% of the employee’s pre-disability income.
Eligibility Criteria
The eligibility requirements and application processes for both private disability insurance and Social Security disability insurance are significantly different.
Private insurance is a type of insurance you apply for before you become disabled, and as long as you’ve been paying your premiums, you’ll have coverage if you ever need it. In contrast, to apply for SSDI, where it’s available only once you have a disability.
Because Social Security Disability Insurance is a component of the United States’ broader public benefits system, you technically have the right to apply for benefits at any time if you satisfy the Social Security Administration’s stringent definition of disability and its requirements for work history and work credit requirements.
However, getting approved for Social Security disability benefits can be challenging. The approval process involves multiple steps that consider not only whether you are disabled but also whether you have a chance of recovering or adapting to other types of work.
If you are disabled to the point where you can’t do your previous job but are able to do something else, even if it pays less money, you will not be eligible for disability benefits.
For instance, if a lawyer loses a limb in an accident but is able to continue doing case research while wearing a prosthesis, they may not be eligible for disability benefits.
Private disability insurance, on the other hand, is much easier to collect. When applying for private insurance disability benefits, you are only likely to experience complications if the disability was brought on by a pre-existing condition, which your insurance policy might not cover, or by illegal behavior, such as the use of illegal drugs.
Both SSDI and private disability insurance require you to provide documentation from your doctor outlining your disability in order to prove your eligibility for benefits.
The Social Security Administration refers to a list of conditions it considers severe enough to be automatically eligible for disability benefits, and any condition not on the list has to be at least as severe as one on the list in order to qualify for benefits.
Whereas, in order to qualify for private disability insurance benefits, all you need to do is prove that you are unable to work due to your disability.
Benefit Period
If you have private disability insurance, you will begin receiving benefits in the event that you become disabled. These benefits will continue until the defined benefit period, excluding an initial waiting period (also known as an “elimination period”) of approximately 90 days.
The duration of the benefit could be a few short years or the entirety of one’s working life. As the defined benefit period gets longer, your monthly premiums will get significantly higher.
In the case of Social Security disability insurance, there is no defined benefit period. Your disability payments will continue until either your condition improves, or you are able to go back to work.
The Social Security Administration will reevaluate your case on a regular basis, taking into account any improvements in your health based on medical advances.
If your disability continues until you reach retirement age, the Social Security Administration will automatically change your SSDI benefits into retirement benefits.
Offset Provision
Most group employer-sponsored disability insurance policies include a provision that allows the insurer to reduce the amount of benefits it pays out if the policyholder receives other types of compensation for the same injury or medical condition, such as state disability, workers’ compensation, or payments from a third party.
This means that the insurance company can deduct any money you get from other sources to make sure you don’t get more than the total monthly disability amount set by the policy.
This is crucial information to remember for those who are totally disabled, as Social Security Disability Insurance payments typically offset group employer-sponsored insurance.
Costs
The price tag could be a deciding factor in whether you opt for private disability insurance or Social Security disability benefits.
Private disability insurance is purchased with premiums, which are monthly or annual charges that are determined by factors including but not limited to coverage requirements, health history, and the length of the benefits period. Your premiums will take up about 1% to 3% of your annual income.
In contrast, you don’t have to pay “premiums” to participate in the Social Security disability insurance program or any other government-funded benefit program since you are contributing to the SSA’s fund by paying Social Security taxes on your work earnings.
The cost of private disability insurance might be too much for many to bear, leaving them with no choice but to apply for Social Security Disability Insurance.
However, if you can afford it, and you have a family that depends on your income, you should consider private disability insurance instead of Social Security Disability Insurance. Those applying for SSDI face a high rejection rate, and even if approved, it can take months before they actually start receiving benefits.
If the Social Security Administration agrees that you are disabled, you can request back pay for the time you spent appealing their initial decision. However, this does not help you with the bills and expenses you incurred while waiting for disability benefits.
Plus, if your claim for Social Security disability benefits is denied, you won’t be able to get insurance through any other means. Considering that you have a pre-existing disability, you won’t be eligible for coverage under a private disability insurance policy.
Taxation
Both Social Security Disability Insurance and private disability insurance may subject your benefits to taxation. Your Social Security Disability Insurance benefits will be subject to income tax only if you have other sources of income in addition to your SSDI benefits.
Your private disability insurance benefits will be subject to taxation if any portion of your premiums were paid for with pretax dollars.
One example would be if your company subsidized a portion of your policy. However, only the portion of your benefits that is equal to the portion that was subsidized counts as taxable income.
Social Benefits Offset Rider for Private Disability Insurance
If you decide to purchase private insurance, you have the option of including a social benefits offset rider in your policy.
A rider is an optional form of insurance that can be added to a policy in order to expand its coverage and benefits. The social benefits offset rider enables you to supplement your private disability insurance coverage with SSDI payments.
This is how the Social Security offset rider works:
Let’s say your private disability insurance coverage is $4,000 per month, yet you only receive $1,000 from the SSA.
The insurance company has to pay you the remaining $3,000. If your application for Social Security disability benefits is denied, but your private disability insurance policy includes a social benefits offset rider, you remain entitled to $4,000 per month in benefits, but they will come exclusively from the private disability insurance provider.
Can SSDI Be Better than Private Disability Insurance?
You should still apply for SSDI benefits, even if you are covered by private long-term disability insurance. Since applying for SSDI is free of charge, the worst thing you can do is wait around for approval.
With Social Security disability insurance, you also get the benefit of reduced healthcare costs.
Anyone receiving Social Security Disability Insurance benefits for at least 24 months is automatically enrolled in Medicare, the federal government’s single-payer health care program typically reserved for retirees. With Medicare, patients can get medical care at deeply discounted or even free rates.
Children of a disabled person are also eligible to receive benefits from Social Security. Your child is eligible for Social Security benefits if they are under 22, have a disability, are unmarried, or are under the age of 18 (Or a full-time student up to the age of 19). It is possible for a child to receive up to 150% or 180% of his or her parent’s full Social Security disability benefit.
Conclusion
So, contrary to what some may believe, there are significant differences between Social Security Disability Insurance and private disability insurance. If you want to learn more about which option is better for you, you may want to consult a disability attorney or speak to a private disability insurance broker to compare your options.
