What Happens If You Have Two Disability Policies?

Disability insurance serves as important financial protection, offering a portion of income when an illness or injury prevents an individual from working. This coverage helps maintain financial stability during unforeseen circumstances, complementing other forms of income replacement. Many individuals secure disability coverage through various avenues, such as employer-sponsored plans or policies they purchase directly.

Understanding Disability Policies

Disability policies broadly fall into two main categories: short-term disability (STD) and long-term disability (LTD). Short-term policies typically provide benefits for a brief duration, often ranging from three to six months, with a maximum benefit period usually not exceeding two years. Long-term disability policies offer income replacement for extended periods, potentially lasting several years or even until retirement age, addressing more severe or prolonged disabilities.

Individuals can obtain disability coverage through group policies, or via individual disability income (IDI) policies. Group plans often offer cost-effective coverage, while IDI policies provide more customization and portability. A policy’s “elimination period” is the time between the onset of disability and when benefits begin, typically ranging from 30 to 365 days for long-term policies. The “benefit period” defines the maximum length of time payments will be received.

A distinction in disability policies is how “disability” is defined, between “own occupation” and “any occupation.” An “own occupation” policy considers an individual disabled if they cannot perform the primary duties of their specific job held before the disability, even if they could work in a different field. In contrast, an “any occupation” policy defines disability more restrictively, requiring the individual to be unable to perform the duties of any job for which they are reasonably qualified based on their education, training, or experience. “Own occupation” coverage is more comprehensive but comes with higher premiums.

How Multiple Policies Coordinate Benefits

When an individual holds multiple disability policies, their benefits are coordinated through specific policy provisions to prevent receiving more than a certain percentage of their pre-disability income. These provisions are referred to as “integration clauses” or “offset provisions.” Such clauses allow one insurer to reduce its payout by the amount a claimant receives from other sources, including Social Security Disability Insurance (SSDI), workers’ compensation, or benefits from another private or group disability policy. The purpose of these offsets is to ensure combined benefits do not exceed a predetermined percentage of pre-disability earnings, often set around 60% to 80%.

The definition of disability in each policy, whether “own occupation” or “any occupation,” plays a role in how benefits coordinate. An “own occupation” policy might pay benefits even if an “any occupation” policy does not, due to its less stringent definition. For example, a professional unable to perform their specialized role might receive benefits from an “own occupation” policy, while an “any occupation” policy may deny the claim if they can perform another job. Insurers require claimants to apply for all other eligible benefits, such as SSDI, allowing them to offset payments once those other benefits are approved.

Policies can supplement each other. For instance, an individual disability income (IDI) policy might be designed to complement a group policy by covering a higher percentage of income or providing benefits for a longer duration than the group plan alone. While combined benefits do not allow an individual to receive more than their pre-disability income, multiple policies can provide a higher percentage of income replacement or broader coverage in various disability scenarios. Some IDI policies may not include a Social Security Disability offset, offering a larger payout.

Filing a Claim with Multiple Policies

Initiating a claim when multiple disability policies are in place requires attention to each insurer’s specific requirements. Notify each insurance carrier separately, adhering to the timelines stipulated in each policy. Each insurer will conduct its own independent review process.

Claimants will need to provide documentation to each insurer, which includes medical records, attending physician statements, and verification of income and employment information. Consistency in the information submitted to all insurers is important to avoid discrepancies that could delay or complicate the claim process. Insurers may request separate medical evaluations or additional information to support their assessment of the claim.

Facilitating information sharing between insurers may be necessary, requiring the claimant to provide specific authorizations. This helps ensure all parties have details to process the claim efficiently. The involvement of multiple parties and their independent review processes can lead to longer processing times for benefits. Maintaining organized records and proactive communication with each insurer can help streamline the overall experience.

Key Financial Considerations

Holding multiple disability policies involves financial considerations beyond the benefit payouts. The cost of premiums for each policy accumulates, impacting an individual’s financial planning and budget. Assess whether the combined coverage justifies the expense, especially when offset provisions reduce the payout from one or more policies.

The taxability of disability benefits is a factor, varying based on how premiums were paid. Benefits received from policies where premiums were paid with after-tax dollars are tax-free. This applies to individual disability income policies. If premiums were paid with pre-tax dollars, such as through many employer-sponsored plans, the disability benefits received are considered taxable income.

Regularly reviewing policy terms and coverage amounts is important to ensure they remain aligned with current income levels and financial needs. Life changes, such as salary increases or new dependents, may require adjustments to coverage. Seeking professional advice from a financial advisor or insurance professional can help optimize coverage, manage premium costs, and understand tax implications in multi-policy scenarios.