Disability Happens: Are Your Employees Insured?

More than 1 in 4 of today’s 20-year-olds will become disabled before reaching age 67, according to recent studies.

Disability can have a profound effect on an individual’s employability and income. U.S. Census figures show that only about a third (34.7 percent) of people with disabilities were employed, compared with 71.9 percent of people without a disability.

It might surprise you, but most disabilities among working-age people do not stem from accidents or injuries, but rather from illnesses such as cancer or heart disease. Chronic conditions, such as back pain and arthritis, which might not be work-related, also cause many disabilities. In these cases, your workers’ compensation and accident insurance benefits will not apply, leaving employees who cannot work without a source of income.

How Disability Works

Disability insurance will pay a benefit to covered employees while they cannot work due to non-occupational disability. This helps them meet their daily expenses and focus on recuperation.

Short-term disability (STD) coverage 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) 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. Better plans pay benefits until the disabled individual returns to gainful employment or reaches age 65 or Social Security Normal Retirement Age (SSNRA), 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.

The most effective plan designs coordinate STD and LTD benefits, so that once the employee exhausts sick pay and STD benefits, LTD benefits begin immediately.

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.

Limits on Coverage

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 of $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 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, insureds 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.

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

In short, group disability income coverage provides good, basic coverage for rank-and-file employees at a reasonable cost. However, some employees, particularly those with higher incomes, might want to supplement group coverage with an individual policy. In most cases, an insured can obtain higher maximum benefits and more liberal definitions of disability with an individual policy.