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What Is An Offset In A Long-Term Disability Claim?

In the context of long-term disability (LTD) insurance, “offset” refers to a provision in the policy that allows the insurer to reduce the amount of benefits paid to the policyholder by any other sources of income the policyholder may be receiving. These sources of income could include Social Security disability benefits, worker’s compensation benefits, pension benefits, third party liability insurance benefits (such as a settlement in an auto accident claim or medical malpractice claim), or state disability insurance benefits.

The purpose of an offset provision is to prevent overpayment of benefits by ensuring that the policyholder’s total income does not exceed their pre-disability earnings. For example, if a policyholder is receiving $2,000 per month in long-term disability benefits and $1,000 per month in Social Security disability benefits, the insurer may reduce the policyholder’s long-term disability benefits by the amount of their Social Security disability benefits.

What Income Can Be Deducted From My LTD Benefits?

Under a long-term disability insurance policy, “other income” refers to payments or benefits you may receive from other sources while on disability. These payments may be deductible from your LTD benefits, meaning the insurer can reduce the amount they pay you by the value of these “other income” sources. While the specific terms depend on the policy, common “other income” sources include: 

Typical Deductible “Other Income” Sources

  1. Social Security Disability Insurance (SSDI): Benefits you or your dependents receive from Social Security due to disability.
  2. Workers’ Compensation Benefits: Payments from workers’ compensation due to work-related injuries or illnesses. 
  3. State Disability Insurance (SDI): Benefits from state-mandated short- or long-term disability programs. 
  4. Unemployment Benefits: Income from unemployment insurance may be considered deductible. 
  5. Retirement or Pension Benefits: Payments from employer-provided pensions, 401(k)s, or other retirement plans, especially if these result from the same employer. 
  6. Severance Pay: Lump sums or ongoing payments tied to your termination of employment. 
  7. Third-Party Settlements: Payments received from lawsuits or insurance claims for injuries that caused or contributed to your disability. 
  8. No-Fault Auto Insurance Payments: Disability-related income provided by auto insurance policies. 
  9. Short-Term Disability Insurance: Benefits paid under a short-term disability policy, particularly if purchased through your employer. 
  10. Other Disability Insurance Policies: Payments from additional private disability insurance policies may sometimes be considered deductible, depending on the integration clauses in your LTD policy. 

Less Common Deductible Sources

  1. Military Disability Benefits: Payments for service-related disabilities under VA or military programs may sometimes be included, depending on policy terms.
  2. Income from Employment While Disabled: Any earnings from part-time or reduced-capacity work while receiving LTD benefits. 
  3. Rental or Business Income: If specifically stipulated in your policy, passive income streams like rental income or business profits might reduce your LTD benefits. 

Exceptions 

Some LTD policies have clauses that exempt certain types of income, such as: 

  • Personal savings withdrawals (e.g., from a personal IRA or savings account).
  • Income from investments (e.g., dividends or interest).
  • Non-related settlement awards (e.g., pain and suffering damages unrelated to income loss).

Key Steps to Understand Your Policy’s Offset Provision

The specific terms of an offset provision can vary depending on the policy, so it’s important for policyholders to review their policy carefully to understand how offsets are calculated and what sources of income may be subject to offset. To know which sources are deductible, review your policy’s “offset” or “other income benefits” clause. If unclear, consult your plan administrator or a legal advisor experienced in disability insurance. 

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