February 25, 2009
SOCIAL SECURITY OFFSET UNDER LONG-TERM DISABILITY INSURANCE
By: Jillian Redding, Legislative Fellow
You asked how our neighboring states handle Social Security offsets with regards to long-term disability insurance.
The states neighboring Connecticut permit social security offsets. One state allows for the offsets with no restrictions (Rhode Island); two states require few conditions, such as notice that any other income is applicable to offsets must be clear in the policy (Massachusetts and Maine). New York has strict conditions for individual disability insurance policies and offsets by insurance companies.
SOCIAL SECURITY OFFSET
A long-term disability (LTD) policy usually includes a provision saying the insurer can compel the insured person to pursue a Social Security disability claim if the insurer believes the person would qualify for the benefits (which is usually the case if the person qualifies). Because Social Security disability benefits are subject to a five-month waiting period, an insurer usually will not begin offsetting (reducing) LTD benefits by the amount of the Social Security disability benefits until six months have passed from the time the insurer told the person to apply for Social Security. When the insurer begins making the offset, it is on a prospective basis only, according to the Connecticut Insurance Department.
MASSACHUSETTS, MAINE, AND RHODE ISLAND
Massachusetts, Maine, and Rhode Island allow for insurance companies to reduce payments based on Social Security offsets.
In Massachusetts, there are no statutes or regulations that control this exact issue, according to Kevin Kroner, Director of External Relations, Massachusetts Division of Insurance. The Massachusetts Division of Insurance requires only that the terms and conditions of the policy, such as allowing offsets from other sources of income, be “displayed prominently within the document and presented in a readable fashion.”
In Maine, the insurer must put in the policy “a clear and conspicuous notice that accurately explains all types of other sources of income that may result in a reduction of the benefits payable under the policy or contract” (Me. Rev. Stat. Ann. tit. 24-A, § 2829-A). According to Norm Stevens, staff attorney at the Maine Bureau of Insurance, this is the only condition placed upon insurance companies in Maine for offset provisions.
In Rhode Island, insurance companies are allowed to offset Social Security payments with no conditions or restrictions, according to Philip Sheridan, a senior insurance rate analyst at the Rhode Island Department of Business Regulation's Insurance Division. He advised that no Rhode Island statute or regulation addresses this matter. His department has received complaints of insurance companies “chas[ing] the insured for any retroactive Social Security payments that are made.” However, this is apparently permissible, because Mr. Sheridan advised that insurance companies do reserve the right to reduce disability insurance payments by any Social Security settlement amount and often have a provision in their policies that requires the individual to apply for Social Security disability insurance.
In New York, individual and group disability policies are controlled by different rules. For group disability insurance, the insurer may offset any Social Security benefits the insured receives, but the insurer does not have to include such a provision (N.Y. Comp. Codes R. & Regs. tit. 11, § 52.18(d)(1)). Under this regulation, insurance companies are
allowed to coordinate with state and federal programs, but the regulation excludes Medicaid and mandatory no-fault automobile insurance benefits. The regulation also allows a dollar-for-dollar reduction provision within the policy on the benefit received from Social Security.
An individual policy must follow strict standards. It does not have to include a benefit offset provision. However, if it does, it must comply with Circular Letter 21 (1982) and N.Y. Comp. Codes R. & Regs. tit. 11, § 52.16(c)(8). The policy may offer social insurance substitute coverage, where the benefits offered would be substituted for the benefits of the social insurance (Social Security) program. It is acceptable for the offset/social insurance substitute provision to require the insured to apply for the Social Security benefits if he or she appears eligible. It may also require the insured to re-apply for benefits, “according to reasonable re-application standards” (Product Outline, Individual Disability Income from the New York Insurance Department). This provision may also require the insured to request reconsideration or appeal a denied application by the Social Security Administration. A provision that “suspends the social insurance substitute disability benefits to encourage insureds to apply for social insurance benefits” is acceptable.
The benefit offset provision may not (1) require the insured to incur the expenses in pursuing the appeal if the appeal is required by the insurer; (2) condition payment of guaranteed base benefits in the policy upon the insured applying for Social Security; or (3) penalize the insured by not paying the Social Security substitute benefit due to the insured “unless the insured applies for social insurance program coverage within a specified time after the date on which the insured is first entitled to apply” (Product Outline, Individual Disability Income Checklist from the New York Insurance Department, citing that the these unreasonable provisions would contravene N.Y. Ins. Law § 3201(c)(3); N.Y. Comp. Codes R. & Regs. tit. 11, § 52.16(d)(8); and N.Y. Ins. Law § 3216(D)(2)).