The Social Insurance Substitute Rider
by Bill Olmsted
You’ve probably heard that if you rely on your income to pay your bills, you should have a disability insurance policy to protect those earnings. This is the cornerstone of a good financial plan. Unfortunately, many people who don’t have a plan at work don’t buy a policy due to the perceived high premium. There are several ways to help reduce the cost, and still maintain a solid income protection plan.
We will look at one of those ways in this article. We will also look at the reality of social security disability benefits, and if these are a good substitute for a private disability insurance policy.
Having sold policies to professionals and business owners for over a decade, I’ve heard many reasons for buying, and not buying. Among the top reasons for buying a policy is the desire to protect one’s income and insure that if something happens that prevents them from doing their own occupation, they have the financial safety net in place to continue paying the mortgage, putting food on the table, saving for the future, and generally living their life. Among the only reasons for NOT buying a policy is the cost.
Premiums for individual disability insurance policies are not cheap, but neither is the value they provide. When working with an agent, it’s important to understand how to structure a policy to save money wherever possible and provide the best value.
The Social Insurance Substitute (SIS) rider is an optional benefit rider on a policy that will save you money every month on your premiums. The SIS rider reduces your premiums by effectively sharing the risk of payment with what are called “Legislated Benefits”. Legislated benefits are social security disability benefits, as well as workers comp and other types of federal, state, and county disability funds.
If you buy a disability insurance policy with the SIS rider, your monthly benefit will be reduced by any amount of benefit that you receive from these legislated benefits, usually up to $1,500 per month. Since the insurance company isn’t taking on the full risk of your monthly benefit, they can charge you less for the coverage than if you didn’t have this SIS rider on your policy. Let’s look at an example of how this works in a real world example.
The monthly premium for $5,000 per month in coverage for a healthy 35 year old male, non-smoker, with a white collar occupation, is approximately $156 per month without the Social Insurance Substitute rider. If we add the SIS rider, the cost of the coverage drops to approximately $146 – about a 6% reduction in premium.
In either situation, the insured would receive $5,000 per month if they were unable to do the duties of their own occupation. The policy with the SIS rider, however, will require the insured to apply for benefits with the Social Security Administration, and if approved for any legislated benefits, the amount of benefit that will be received from the insurance company will be reduced proportionally. For example, if someone was receiving $5,000 per month from the insurance company, and qualified for legislated benefits in the amount of $1,500 per month, they would continue to receive the difference from the insurance company, or $3,500 per month. They would still receive their full $5,000 per month in benefits, but it would be split between the insurance company and Social Security.
If this insured didn’t have the SIS rider, and simply had $5,000 per month of coverage, any legislated benefits that they qualified for would be in addition to the $5,000 per month. In this example, they could possible get up to $6,500 per month in income.
When an insurance company splits the risk of paying benefits with the government, they charge a lower premium than if they are obligated to pay 100% of the purchased benefit. So, is $5,000 with a lower premium a better deal than $6,500 with a slightly higher premium? In order to determine whether or not the SIS rider is a good way to save money, we must consider whether or not it’s likely that someone will qualify for legislated disability benefits. If it’s not likely that they will qualify for these types of benefits, then it’s not likely that they would receive the $6,500 total monthly income, and the $5,000 per month income becomes a better value.
The definition of disability under a true own occupation disability insurance policy and Social Security disability, is very different. It is likely that someone who qualifies for benefits under their individual disability policy, because they cannot do the duties of their own occupation, will not qualify under Social Security. In fact, nearly 65% of all initial disability claims filed with Social Security are denied.1 In order to determine eligibility for benefits, there is a 5 part process.2
How Social Security decides if you’re disabled:
1. Are you working?
If you are working in 2016 and your earnings average more than $1,130 a month, you generally cannot be considered disabled.
2. Is your condition considered “severe”?
Your condition must interfere with basic work-related activities for your claim to be considered. If it does not, you are not disabled.
3. Is your condition found in the list of disabling conditions?
The government maintains a list of medical conditions that are so severe, that they automatically mean that you are disabled. If you have a condition that is not on the list, the government has to decide if it is sever enough to qualify for benefits.
4. Can you do the work you previously did?
If your condition is not on the list of severe medical conditions, but is severe enough to prevent you from doing your job, the Social Security administration proceeds to step 5.
5. Can you do any other type of work?
If you cannot do the work you did in the past, they see if you are able to adjust to other work. They consider your medical conditions and your age, education, past work experience and any transferable skills you may have. If you cannot adjust to other work, your claim will be approved. If you can adjust to other work, your claim will be denied.
As you can see, getting approved for benefits under Social Security disability is very difficult. Basically, if you are not totally disabled from doing any type of work, you’re not getting any benefits. Given this, the SIS rider is a good value for most people. It will reduce your cost of getting a disability insurance policy, and will only reduce what you get by the insurance company in the unlikely event that you qualify for legislated disability benefits under the Social Security Administration, or other government agencies.
Even if you were to qualify under the government benefits, you would still receive the total monthly benefit you purchased from the insurance company. If you’re looking to reduce your premiums on a policy, the social insurance substitute rider should be considered.
William Olmsted is a Registered Representative of Park Avenue Securities LLC (PAS). Securities products offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Financial Balance Group, LLC is not an affiliate or subsidiary of PAS or Guardian.
Individual disability income products underwritten and issued by Berkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary of The Guardian Life Insurance Company of America (Guardian), New York, or provided by Guardian. Product provisions and availability may vary by state. Optional riders are available for an additional premium.
2016-23335 Exp. 5/18