By age 45, an individual has a 50 percent chance of having at least one disability that lasts 90 days or more. In fact, workers have a higher chance of suffering a long-term disability than of premature death during their career. Disability benefits protect your employees from a catastrophic loss of income when a disability makes them unable to work, or unable to work full-time.
Disability benefits generally fall into one of three categories:
• Paid sick leave
• Short-term disability (STD)
• Long-term disability (LTD)
Usually, group plans have very streamlined or no underwriting requirements so employees do not have to answer a lot of health questions. Your less-than-healthy employees will find it easier to obtain coverage through the group market than through individual policies. In addition, group coverage usually costs less than an individual policy.
The National Association of Insurance Commissioners (NAIC) says that a male U.S. worker at age 35 faces a one-in-five chance of a disability taking him off his job for 90 days or more. For a 35-year-old woman, that risk increases to one in three.
Most working adults don’t have the savings needed to pay their expenses if they were unable to earn an income for 90 days or more. Disability income insurance replaces a portion of an insured’s pre-disability income when they cannot work or cannot work full-time due to a disability.
The most effective disability benefit plan designs coordinate sick leave, short-term disability (STD) and long-term disability (LTD) benefits, so that once the insured exhausts sick pay and STD benefits, LTD benefits begin immediately. Disability income insurance replaces only a portion of lost income to give disabled individuals some incentive to return to gainful employment after a disability.
Higher Limits for High-Income Individuals
Individual disability income insurance plans offer higher monthly benefits and enhancements that are not available in group plans. Higher-income people should consider supplementing any group disability program with individual coverage.
Employer-Paid or Voluntary LTD?
Under an employer-paid LTD plan, employees do not include the employer’s contribution to premiums in their taxable income. However, any benefits they receive will be included in taxable income. Voluntary coverage has the advantage of providing your employees benefits tax-free, if they used after-tax dollars to buy coverage.
Paid sick leave
No law requires employers to provide paid sick leave, but many provide up to two weeks’ paid sick leave per year or give employees “paid leave banks,” which they can use for any reason.
Short-term disability (STD)
This is the most commonly found type of group disability insurance. STD plans typically have a waiting period of 0 to 14 days before a covered individual will receive benefits, and they provide benefits for a maximum of six months to one year.
Long-term disability (LTD)
LTD policies usually begin paying benefits 30 to 180 days after the disability occurs, once the covered individual has exhausted sick leave and short-term disability benefits.
The typical group long-term disability policy will begin paying benefits when a worker cannot work due to a disability lasting longer than the specified “elimination period.” For most group policies, the elimination period is somewhere between 90 and 365 days. Better plans pay benefits until the disabled individual returns to gainful employment or reaches age 65, whichever comes first. Many LTD plans also offer partial or residual disability benefits to help offset earnings lost while the employee transitions back to full-time work.
Both STD and LTD policies replace only a portion of an insured’s salary, typically 60 percent, up to the monthly maximum benefit. Most group policies have a maximum monthly benefit $5,000, which does not include bonuses or dividends. In addition, most insurers will coordinate benefits from a group policy with benefits from any individual disability policies the employee might own, so he or she will not collect more than 80 percent of pre-disability pay.
Many group LTD policies use two different definitions of disability, depending on how long a claim lasts. These policies use a “modified own occupation” definition of disability during the first two years. This definition considers an insured employee disabled when “… unable to perform the material and substantial duties of your occupation, and [you] are not engaged in any other occupation…” After two years, the definition of disability becomes more restrictive. Exact definitions vary, but most require the insured to be unable to perform any of the material and substantial duties of any occupation for which he or she is “reasonably qualified” by education, training or experience.
If a policy does not provide partial or residual disability benefits, an insured employee must navigate changing disability definitions, accepting no work other than their own occupation during the first two years, and then taking any job for which they are qualified after that.