Many financial advisors are thoroughly educated and competent when it comes to coordinating Social Security benefits with IRA and retirement plan distributions and portfolio management. But a large percentage are far less proficient at integrating Social Security disability income into a financial plan, as many financial planning programs do not contain modules for this type of income. Advisors who are able to overcome this factor and provide sound advice and planning for clients who receive disability benefits can carve out a profitable niche for themselves while providing a valuable service.

How They Work

Although many advisors are now familiar with the new, more restrictive rules that pertain to retirees who apply for Social Security benefits, they often have questions when it comes to issues such as whether a spouse can claim benefits if the primary breadwinner receives disability payments. In order to answer this question, it is necessary to understand how Social Security disability payments work. This type of income is only available to Social Security recipients who are medically and physically incapable of working any type of job, and their disability is expected to last for either at least a year or until they die. (For more, see: Disability and Retirement: How to Prepare Clients.)

In order to qualify for benefits, the applicant has to pass both a recent work test that demonstrates an inability to perform the duties related to a job and a duration of work test that proves that the applicant has worked long enough under the Social Security system to qualify for benefits. Those who can meet these tests and gain approval will receive a monthly stream of income that is based upon their average lifetime earnings. Eligible applicants will begin receiving benefits during the sixth full month after their disability arose. Those whose applications are denied have the option of making an appeal to the Social Security Administration.

Recipients who receive benefits for two years become automatically eligible for Medicare coverage regardless of how old they are. Once the recipient reaches full retirement age, the disability benefits are automatically converted into retirement benefits, which will remain at the same level as before.

Family Members

There are several types of family members who may also qualify for disability income, such as the recipient’s spouse if he or she is at least 62 years old, a spouse of any age if he or she is caring for a child who is either under age 16 or disabled and an unmarried child, even if he or she was adopted. Stepchildren and grandchildren may also be eligible to receive disability benefits in some cases as long as they are under age 18. Adult children who were permanently disabled before age 22 are also eligible. (For more, see: How You Can Help Clients with Social Security.)

Ex-spouses may also be eligible if they were married to the primary recipient for at least 10 years and are over age 62 and are not currently married. The benefits that the ex-spouse receives will not reduce the benefits paid to the primary recipients or their family members. Ex-spouses who have reached full retirement age can also file for spousal Social Security benefits based upon their ex-spouse’s disability benefits as long as they had been married for at least 10 years.

Those who were born before Jan. 2, 1954 have the option of collecting an amount equal to half of their ex-spouse’s benefit while they allow their own benefit to continue to grow until the maximum benefit amount has been reached. Those who were born after this date will simply automatically receive a benefit equal to the greater of the benefit that they can receive based upon their own earnings record or the spousal benefit as an eligible divorced spouse. But the primary recipients of Social Security disability income do not have the option of claiming spousal benefits and allowing their own benefits to grow to the maximum possible amount. They can suspend their benefits if they like, but they cannot receive spousal benefits in the meantime.

A final issue to consider is when a couple has not yet reached full retirement age, and the primary disability benefit recipient dies. The spouse will still have the option of receiving the full survivor benefit equal to the amount of disability income that was paid when he or she reaches full retirement age.

The Bottom Line

Financial advisors who have clients who receive disability income from the Social Security Administration would be wise to find a financial planning program that is capable of including this type of income in its modules. The rules for disability income are similar to those for regular benefits in many cases, but there are a few wrinkles that advisors need to be familiar with in order to provide proper planning. (For more, see: Top Financial Steps to Take on Disability.)