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The Alphabet Soup of Disability Income: SSDI, LTD and WC

When you can't work, there are three programs that can help: Social Security Disability Insurance, long-term disability and workers' comp. You may even qualify for more than one, but that can also cause issues.

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We like to think we’re invincible. We tell ourselves it’s not possible that one day we’ll experience a health problem severe enough to keep us from working. But for many Americans, that “one day” arrives on a daily basis. In fact, one-in-four 20-year-olds can expect to be out of work at least a year due to disability.

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Understanding the types of financial support available can be an uphill battle. It’s acronym soup — SSDI, LTD, WC — what’s the difference? Are you eligible for one benefit, but not another? Can you take advantage of multiple benefits, or could that cause a problem?

If a medical condition has left you unable to work, you may be entitled to three main sources of supplemental income:

  • Social Security Disability Insurance (SSDI)
  • Long-term disability (LTD)
  • Workers’ compensation (WC)

Each of these programs provides different benefits and has different requirements. So it’s vital to assess your options and make sure all your payments are properly integrated, including whether receiving one type of resource precludes you from receiving another.

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When you have multiple sources of disability income, issues and complications often arise. Avoiding them takes some knowledge and coordination. As May is Disability Insurance Awareness Month, let’s take a moment to sort it out.

Social Security Disability Insurance (SSDI)

Millions of former U.S. workers currently receive SSDI benefits, having paid into the Social Security system throughout their working lives via their FICA taxes. The majority of FICA taxes are used for Social Security retirement and Medicare benefits, with a smaller percentage funding the Social Security Disability Insurance program.

To qualify for SSDI, applicants must have worked for five of the past 10 years. In addition, they must be below full retirement age (65-67) and suffer from a severe work-disrupting injury or physical/mental illness that will last at least a year (or is terminal).

Unfortunately, the SSDI application process is extremely lengthy and complicated, so it’s best to apply as soon as you must stop working. People with one of 225-plus of the most severe conditions, including some cancers and heart disease, can be fast-tracked under the government’s “compassionate allowances” program. If you are denied initially — and most applications are — you may still be eligible for a hearing to consider your case. However, receiving this decision from a Social Security administrative law judge could take up to two years.

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If you are awarded benefits, the SSDI amount you receive varies based on the total amount you paid in FICA taxes during your career and the number of years you have been in the workforce. The average benefit in 2018 is $1,197 a month, but if your recent income was fairly high, you may receive up to $2,788. After receiving SSDI, then your eligibility is subject to review by Social Security at certain intervals through Continuing Disability Reviews, or CDRs, usually after one, three, five or seven years.

In addition to monthly checks, SSDI comes with some other important benefits:

  • Medicare coverage begins 24 months after your SSDI benefits start
  • Annual cost-of-living adjustments (COLA)
  • Dependent benefits
  • Protection for your Social Security retirement benefits because of a records freeze
  • Free support with returning to work, if you’re medically able

There’s one other important side note. SSDI benefits automatically transition to Social Security retirement benefits (with the benefit amount remaining the same) when you reach your Social Security full retirement age. There is no reason to take early retirement at age 62 if you receive SSDI, nor will delaying retirement increase your benefit. You will receive the same amount as you did before retirement. In this way, SSDI helps preserve and protect your retirement benefit — the “records freeze” prevents periods of no employment and/or lower earnings from affecting future retirement benefits.

Long-Term Disability Insurance (LTD)

About one-third of employees have the financial advantage of employer-provided LTD insurance coverage. However, if your employer does not offer LTD, you have the option to purchase a plan for yourself from a private insurer. In an ideal world, everyone should explore the option of LTD coverage, although it can be pricey. In particular, people who have put a lot of time and money into their careers should consider it to protect their investments.

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Similar to SSDI, LTD benefits are used as income replacement if you experience a severe medical condition. However, the requirements to qualify for benefits are not as stringent, and it usually takes much less time to start receiving payments. LTD benefits differ from SSDI payments in that they typically constitute a fixed percentage (usually 60%) of your salary at the time of your disability. Depending on your previous earnings, that means the benefit payments can be higher than SSDI, depending on your plan’s specifications.

The duration of your LTD coverage can be limited. It will depend on your ability to perform your most recent job, and often any work outside of your most recent occupation. For example, benefits for mental/nervous disabilities are usually limited to two years. Benefits for other types of disabilities can continue until age 65 or retirement age, depending on the specific policy, unless your medical condition improves.

LTD policies often require you to apply for SSDI as a condition for continuing to receive LTD benefits if in cases where it’s highly unlikely you will work again. If you’re eligible for both LTD and SSDI, your LTD payment will be reduced by the amount of your SSDI payment. This benefit reduction is called an “offset.” It usually occurs as soon as the LTD provider learns you will receive SSDI payments as well.

For example, if you receive $2,000 per month in LTD benefits and then qualify for $1,100 per month in SSDI benefits, your LTD benefit is reduced to $900 per month after the dollar-for-dollar offset. You will then receive $1,100 per month in SSDI and $900 per month in LTD, for the same $2,000 per-month total.

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The SSDI approval process can take anywhere from a few months to a year or more. Your LTD plan usually will continue to pay the full LTD benefit amount during most or all of this time. As a result, if you are awarded SSDI benefits, a retroactive benefit will likely be paid to you by the SSA. And because you received benefits from both your LTD plan and the SSA covering the same time period, an LTD overpayment occurs. The LTD overpayment must be repaid to the insurer.

LTD plans can implement offsets for other benefits, too, including veterans’ disability, workers’ compensation payments, short-term disability income and other related benefits. If you have LTD coverage and don’t comply with your plan, you risk losing your benefits.

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Workers’ Compensation

Workers’ compensation is a type of insurance that provides wages and medical benefits if you are injured while on the job (e.g., slips, falls or machinery-related accidents).

A key difference between being eligible for workers’ compensation and LTD or SSDI is that your injury must have been the direct consequence of a work-related task. Most state laws require employers to offer this coverage. It provides a safety net for workers as well as employers, who can use workers’ compensation to protect themselves from employees taking legal action against them.

Workers’ compensation is designed to be a temporary source of income while you are healing and recovering. For example, this benefit would be appropriate if you fall from a ladder on a job site and are out temporarily while your injuries heal. However, if your condition becomes more severe or permanent, you may be eligible to apply for SSDI benefits as well.

In some cases, you can collect both workers’ compensation and SSDI simultaneously for a period of time. However, the combined income from both these benefits cannot exceed 80% of your previous salary, and there may be an offset to the state or Social Security, depending on where you live. Because workers’ compensation will pay for medical expenses related to your injury, it’s possible you may be filing a workers’ compensation claim, as well as an LTD claim for benefits. Because workers’ compensation will pay for medical expenses related to an injury, those filing for LTD benefits may be required to file for workers’ compensation, as well, to offset those costs.

What Do I Do Now?

There’s so much to cover when it comes to disability benefits — much more than can be covered in just one article — but the more reading you do, the better. To determine whether you are eligible and likely to qualify for SSDI, you can research the basics of eligibility on the National Organization of Social Security Claimants’ Representatives (NOSSCR) website, or you could complete a free disability evaluation online.

Often it takes an expert who speaks the language of disability income, knows you and your particular case, and can serve as an intermediary to guide you through the complex world of integrating SSDI, LTD and more. A representative can advocate for you before and during a hearing, help you with paperwork and navigate the SSDI claims process with you. They’ll be able to help you find and reconcile different types of disability insurance available to you and oversee your obligation to repay any excess benefits in the event of an offset.

Wherever you choose to look for help, start now if you think you might be eligible or soon become eligible for any one of these benefits. Traveling through the world of disability income shouldn’t be so consuming that it forces you to leave your old life behind — and you never have to go it alone.

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Mike Stein, assistant vice president of operations strategy and planning, has 25 years experience helping people with disabilities through his work with Allsup. He oversees the claims operations for both Social Security Disability Insurance representation and the Veterans Disability Appeal Service for veterans. During this time, he has become an authority on the SSDI application process, as well as Social Security Administration programs.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.