Group Disability Insurance: Know All the Facts

Long-Term Disability plans offer affordable benefits

One in seven workers will be disabled for five years or longer during their working years. Workers’ compensation will cover your employees if they are hurt on the job, and health insurance will help cover their medical bills. But if an employee is unable to work for an extended period, how will they meet their regular expenses? Disability insurance will pay a portion of an injured or ill worker’s salary while he or she is disabled, giving him or her one less thing to worry about during recovery.

Disability and unpaid medical bills are among the leading causes of bankruptcies nationally, and those figures do not tell the whole story of sudden poverty, broken marriages and ruined lives. In fact, five states including Puerto Rico (New York, New Jersey, Rhode Island, California, and Hawaii) consider disability insurance so important they require employers to provide short-term disability insurance to their employees.

Short vs. Long-term

Short-term disability coverage is the most commonly found type of group disability insurance. Short-term disability (STD) products typically provide benefits for six months to one year, while long-term disability (LTD) policies often pay benefits until the disabled individual either returns to gainful employment or reaches age 65.

In California the state mandated short-term disability is called State Disability Insurance or SDI. SDI covers approximately 55% of an injured employee’s weekly lost wages, however currently the weekly maximum is $882 per week. $882 per week is only 46% for an employee earning $100,000 per year! Many employers offer an STD benefit to supplement the state benefit, which especially helps higher income earners.

All types of disability insurance have an “elimination period” during which the insured must be disabled and unable to work (or partially disabled and suffering a loss of income) before benefits begin. For STD policies, the elimination period is typically seven days in California. For LTD policies, elimination periods generally range anywhere from three to six months of continuous total or partial disability. The LTD elimination period is typically 90 days in California.

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 disability two-step

Most group LTD policies have one definition of disability that applies at the start of the claim and another in the later stages. Policies usually define disability more liberally during the first few years of a claim, which can lead the insured into a false sense of security.

Specifically, group LTD policies use an “own occupation” definition of disability typically applied for two or three years. Such a definition considers an insured disabled when “…unable to perform the material and substantial duties of your OWN occupation.”

After that, the definition of disability changes. 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 you would like Thoits to review your current LTD contract and explain the advantages and disadvantages of your definition of disability we are happy to do a free risk analysis of your LTD program.

Communication

People facing a sudden disability do not take additional unpleasant surprises well. Educating employees about what they can expect from their group disability plan can help avoid misunderstandings. Benefits will replace only a portion of an insured’s salary, typically 60 or 66 2/3 percent. Employees also should know that most insurers will coordinate group benefits with benefits from individual disability policies the employee owns. In most cases, insurers will not let anyone collect more than 80 percent of his or her pre-disability pay; some may have a specific dollar amount cap.

Group disability benefits can also have tax consequences. If your plan is employer-paid, any benefits received will be taxable income to the employee. Benefits from employee-paid (or voluntary) plans will be tax-free.

For more information on disability income insurance plans and how they might benefit your employees, please call us.

Initial COBRA Notice

When you have a new hire don’t forget to send them their initial COBRA Notice!

The Initial or General COBRA notification letter is often overlooked as an essential part of the new hire process.

Federal law requires you to notify an employee of COBRA rights both at the time he or she becomes covered by a plan subject to COBRA and at the time of a qualifying event.

The Initial notice provides an overall summary of the future continuation rights of qualified employees and their families and outlines the procedures they will need to follow.

For more information please contact us.