What Happens If I Don’t Pay Back Long-Term Disability?

Long-term disability (LTD) benefits offer financial support, providing income replacement for individuals unable to work due to prolonged illness or injury. These benefits often cover a percentage of pre-disability earnings. However, recipients may be asked to repay benefits, known as overpayments, which can create financial uncertainty and stress.

Understanding Long-Term Disability Overpayments

An overpayment occurs when a long-term disability insurance provider pays a recipient more benefits than they were entitled to under the terms of their policy. Several common scenarios, often stemming from the complex nature of coordinating various benefit sources, can lead to these overpayments. Repayment is typically still required, even if not due to an individual’s error.

A frequent cause of overpayments involves the coordination of benefits with other income sources, particularly Social Security Disability Insurance (SSDI) and Workers’ Compensation benefits. Many LTD policies contain provisions that allow the insurer to reduce, or “offset,” their payments by amounts received from these other sources. For example, when an individual receives a retroactive lump-sum payment from SSDI, the LTD insurer may demand repayment for the period during which both full LTD and SSDI benefits were simultaneously paid. This offset can also include family benefits awarded to eligible dependents through Social Security.

Benefit miscalculations by the insurance company can also result in an overpayment. Administrative errors, such as incorrect calculations of the initial benefit amount or eligibility period, occasionally lead to an insurer paying more than the policy allows. While the mistake originates with the insurer, the policy terms often place the responsibility for repayment on the recipient.

Changes in a recipient’s eligibility or income status can also trigger an overpayment. If an individual returns to work, even part-time, or experiences an improvement in their medical condition, but benefit payments continue for a period, an overpayment may occur. Policyholders are typically required to report any changes in their health, work status, or other income sources to their insurer. Failure to meet these reporting requirements can lead to continued payments that later become subject to recovery.

Consequences of Unpaid Overpayments

Failing to address an identified long-term disability overpayment can lead to serious repercussions from the insurance provider. Insurers have various methods to recover funds they deem overpaid, and these actions can significantly impact a recipient’s financial stability and legal standing. Ignoring an overpayment notice is not advisable.

If an individual is still receiving LTD benefits, the insurer will commonly reduce or completely withhold future monthly payments until the overpaid amount is recovered. This method allows the insurer to recoup the debt directly from ongoing benefits, which can drastically reduce the recipient’s available income. Some policies may permit the insurer to deduct the full amount from future payments, potentially leaving the recipient without any benefits for a period.

In cases where benefits have ceased or the ongoing payments are insufficient to cover the debt, insurers may initiate direct collection efforts. This process often begins with formal demand letters outlining the overpayment amount and requesting immediate repayment. If these initial attempts are unsuccessful, the insurer may engage third-party collection agencies to pursue the debt, leading to persistent contact from collectors.

Insurers can also pursue legal action to recover the overpaid amount. This may involve filing a civil lawsuit against the individual to obtain a judgment for the debt. If a judgment is secured, the insurer gains legal tools for collection, such as wage garnishment or liens on property. While civil judgments generally no longer appear directly on credit reports as of 2017, the underlying debt that led to the judgment can still negatively affect a credit score. Judgments are public records and can be discovered by lenders, landlords, or employers, potentially hindering future financial or housing opportunities.

Some long-term disability policies or state regulations may also allow for interest to be charged on the overpaid amount. This can cause the debt to grow over time, increasing the financial burden on the individual. The specific terms regarding interest accrual are typically outlined within the policy document.

Strategies for Addressing Overpayments

When faced with a long-term disability overpayment demand, taking proactive steps can help manage the situation and potentially mitigate its financial impact. Ignoring the notice is not advisable. Understanding the options available is an important first step.

A thorough review of the overpayment notice is essential to understand the basis of the claim. Individuals should carefully examine the stated overpayment amount, the specific reason cited for the overpayment, and the period it covers. It is prudent to verify the insurer’s calculations and ensure accuracy, as errors can occur. Gathering all relevant documentation, such as benefit statements and income records, will support this review.

Communicating promptly with the insurer is a constructive approach. Rather than avoiding contact, initiating a dialogue can help clarify the situation and explore potential solutions. Many insurers are open to negotiating a manageable repayment plan, especially if a lump-sum payment is not feasible for the recipient. These plans often involve monthly installments spread over a period, making the repayment more affordable.

If an individual believes the overpayment decision is incorrect, they have the right to appeal the decision. The appeal process typically involves an internal review by the insurer, where the recipient can present evidence and arguments to dispute the overpayment. For employer-sponsored plans governed by federal law, there are specific administrative appeal requirements that must be exhausted before legal action can be pursued. The insurer’s overpayment notification should detail the steps and deadlines for filing an appeal, often providing a minimum of 60 days for this process.

Seeking professional advice is often beneficial, particularly in complex cases or when legal action is threatened. Consulting with a financial advisor or an attorney specializing in disability law can provide valuable guidance. These professionals can help interpret policy language, assess the validity of the overpayment claim, negotiate with the insurer, or represent the individual during an appeal or in court, helping to protect their rights and financial well-being.