Social Insurance Rider on Disability Insurance: Pros and Cons, Revealed

When a client handed me a detailed list of benefit riders for their long-term disability insurance policy, I expected the usual requests: benefits up to age 65, own-occupation coverage, a 90-day elimination period, a cost of living rider and partial disability benefits. 

But they also asked to put $2,000 on the social insurance substitute rider (SIS rider), which raised a question in my mind — should I sell this client exactly what they’re asking for?

Everything they requested is pretty standard on most disability coverage with the exception of the SIS rider. Here’s a closer look at what this rider is and why it isn’t always the best choice.

What is the social insurance substitute rider?

The SIS rider requires the policyholder to apply for Social Security Disability Insurance (SSDI) whenever a disability claim is made on their policy. If the Social Security Administration (SSA) approves any benefit amount, the insurance company reduces the amount they pay the policyholder. 

The major perk of choosing the SIS rider

The SIS rider relies on Social Security to pick up a portion of your benefit amount paid out and minimizes the insurance company’s obligation to pay you disability benefits. It can significantly lower your monthly premiums on the disability policy, which is why my well-informed client wanted it.

The SIS rider can backfire: What to watch out for

Consider this scenario: a policy normally pays out $5,000 a month, with $2,000 of that amount tied to the SIS rider. The client experiences an injury after several years and makes a claim on their policy after the 90-day waiting period. Instead of immediately receiving the full $5,000 monthly benefit, the policy only pays out $3,000 initially. 

The reality of applying for SSDI

That significant benefit discrepancy is because the policyholder has to apply for Social Security disability benefits. Herein lies the main issue I have with this rider: you have to be denied first before the private policy will make up the difference. It seems easy enough, but the reality can be quite different.

A colleague of mine has a client who’s been waiting for a year to get a decision from the Social Security Administration. Not only is the government notoriously slow, but their definition of disability is also much stricter. To qualify:

• A person must be unable to do any substantial gainful activity (pretty much a total disability).
• The disability must be expected to last at least a year.
• There must usually be some history of full-time employment.

If you qualify, SSDI would pay out disability income until retirement age, provided the person remains disabled. At that point, the benefits switch to retirement benefits. 

But there’s another catch — be sure to check the contract language since insurance companies can sometimes subtract benefits from other sources, such as workers’ compensation.

Delayed benefits while waiting for SSDI approval

Back to the hypothetical situation here, this policy is realistically only paying out $3,000 per month, potentially for an extended amount of time. If the client’s SSDI claim is denied, the insurance company might have the right to ask them to appeal the decision first before paying the full benefit amount. 

Meanwhile, the policyholder might have to pay $2,000 on rent or a mortgage plus fixed expenses that they can’t get out of like utilities and car payments. 

We’ve all heard the stat that a lot of Americans don’t have an emergency fund. A recent study from Clarify Capital shows that 54% of us couldn’t survive three months without our regular income. 

When discussing this rider with clients, I make a point to understand their financial obligations. Given the potential downsides, the SIS rider isn’t on the list of optional riders that I recommend to most clients.

When might the SIS rider be appropriate?

In my opinion, the SIS rider should be a last resort. If the premiums are too high to insure income at the level the client needs, then this disability insurance rider becomes more attractive. Having some disability coverage is infinitely better than having none at all. 

Why even high-earners should think twice about the SIS rider

On the opposite end of the pendulum, even if a high-earning professional with a substantial emergency fund wants to save on premiums, I’d still hesitate to recommend it. 

Remember that private policies have a more favorable definition of disability compared to the Social Security Administration. The social insurance substitute rider requires the client to apply for SSDI benefits, even if they’re unlikely to qualify, which can be a waste of valuable time. 

Unless the client is the extremely thrifty type and willing to spend hours searching coupons for their weekly trip to the grocery store, I’ve found that for many high-earning professionals, the old adage rings true: time is money.

You can always apply for SSDI separately

It’s worth noting that if you really want to apply for SSDI, you can still do that without the SIS rider and potentially get to double dip on your disability benefits. 

If you’re interested in exploring your options, request a disability insurance quote from our team at SLP Insurance. We can have a conversation about which optional riders make the most sense for your specific situation and profession.