Q&A on Handling Disability Insurance Payments
COVID-related illness has forced many people to tap short- or long-term disability insurance.
The pandemic has increased households’ awareness of their need for income protection. COVID-19 deaths were a frightening aspect of the pandemic, and households from a range of incomes bought more life-insurance policies than in years past. According to the industry research firm Limra, the number of life-insurance policies sold jumped 11 percent in the first quarter from a year earlier. This represented the biggest gain since 1983, and the boost extends the sales increases that began last year as deaths related to COVID-19 led many consumers to buy coverage.
While the death toll due to COVID-19 was high in the U.S., the number of individuals who were infected with COVID and became unable to work was even higher. This led to the increased awareness of the need to protect one’s income stream in case of temporary or long-term disability. As a result, when you certify or recertify households, you may come across more tenants or applicants telling you that they’re getting disability payments through a short-term or long-term disability insurance plan.
These payments replace part of the wages household members lose when they can’t work due to illness or injury. The household member may be getting short-term disability payments for a limited amount of time through a private insurance company or statewide insurance fund. Or the member may be getting long-term disability payments that may continue until he reaches retirement age, if he remains disabled that long.
The following are answers to some common questions managers typically ask when dealing with household members or applicants who get disability payments.
Counting Disability Payments in Household Income
Q Should I count disability payments in household income?
A Yes. HUD says disability payments are income that you must verify [Handbook 4350.3, exh. 5-1]. Count the full amount of payments the household member gets. And don’t deduct any premiums or payroll taxes that the household member may have paid toward the disability insurance.
Treating Lump-Sum Payments as Assets
Q Suppose a household gets a lump-sum disability payment. Do I treat that amount as income or an asset?
A The answer depends on whether the lump sum was a one-time payment or a delayed periodic payment.
One-time, lump-sum payment. Generally, lump-sum amounts from insurance settlements are considered assets, not income [HUD Handbook 4350.2, par. 5-6(Q)(1)].
Delayed periodic payment. Sometimes, due to processing delays, a household member doesn’t start getting payments until several weeks after qualifying for benefits. So she may get several weeks of payments in one lump sum before her regular weekly payments begin. Count this lump sum in annual income [HUD Handbook 4350.3, par. 5-6(Q)(4].
According to Exhibit 5-1 from the HUD Handbook, the full amount of periodic amounts received from insurance policies including a lump-sum amount or prospective monthly amounts for the delayed start of a periodic amount is included in income. An exception for including deferred periodic amounts in income would be payments from Supplemental Security income and Social Security benefits that are received in a lump-sum amount or in prospective monthly amounts or, for Section 8 tenants only, any deferred Department of Veterans Affairs disability benefits that are received in a lump sum or in prospective monthly amounts [HUD Handbook 4350.3, par. 5-6(Q)(2) and (3)].
Counting Short-Term Disability Payments
Q How do I count short-term disability payments?
A Annual income is the gross amount of income anticipated to be received by all adult members of the household during the 12 months following the date of certification or recertification. Even though short-term disability payments are typically paid for less than a year, HUD requires you to calculate household income as if the member will be getting the payments for the entire year.
The HUD Handbook states, “Generally, the owner must use current circumstances to anticipate income. The owner calculates projected annual income by annualizing current income. Income that may not last for a full 12 months should be calculated assuming current circumstances will last a full 12 months” [HUD Handbook 4350.2, par. 5-5(A)(1)].
This means you must “annualize” the member’s disability payments. To do this, multiply the gross weekly payment shown on the verification form or printout by 52. Include the total in your calculation of household income.
Although site managers refer to Chapter 5 of the HUD Handbook 4350.3 for guidance on what’s included and excluded in annual income, it’s important to note that Section 8 allowances and adjustments to income such as elderly deductions, child deductions, medical expenses, and childcare expenses aren’t applicable to the LIHTC program. The LIHTC program uses gross income (not adjusted income) to qualify potential households.
Verifying Disability Payments
Q Can I verify the disability payments using a check stub?
A Yes. However, checks or automatic bank deposit slips may not provide the gross amount of benefits. These would show only the net amount of payments after deducting taxes and Medicare. A written verification of the disability payments from the insurer that pays them or the agency that provides them would be a better form of verification.
If you can’t get verification directly from a third party, you can also use the household member’s disability benefit notification letter prepared and signed by the insurer or agency representative.
When verifying the payments, verify the amount, the date the payments began or will begin, and how many weeks the household member will be eligible for coverage. Remember that third-party verifications are valid for 120 days following receipt. Owners may not rely on verifications that are more than 120 days old. After this time, a new written verification must be obtained.