Inside Scoop on Disability Insurance
By Jeanne Lazo and
Carol J Amato
employers try to hire the best employees possible.
They make a significant investment in training with the hope
that these people will make a positive contribution to the company for
many years to come. Sometimes,
however, this plan is derailed by disability.
According to the Society of Actuaries (1995), one out of seven
employees will suffer a five-year or longer period of disability
before age 65. The
probability that a 35-year-old employee will experience a three-month
or longer disability is 50%.
can you minimize the draining effect of disability on your business
and its employees? One way
is to offer disability insurance, sometimes called group insurance.
Another is to advise employees about what they need to do to
Why Offer Disability Insurance?:
By law, U.S. companies aren’t required to offer
disability insurance benefits. Why,
then, should your company offer this coverage?
Competition: If your competitors (or
those competing for your employees) offer disability benefits, then
you should, too, because you want to attract and retain the best
Most Americans’ greatest
asset is the ability to earn a living, yet most have savings to cover
only six month’s of living expenses.
Employees’ income/earning ability needs to be insured far
more than their homes, cars, or other tangible goods.
Disability is unpredictable: Common
causes of disability include cancer, back problems, diabetes, heart
disease, and accidents. From
this list, it’s clear that employers cannot eliminate the risk of
many types of disabilities from affecting its workforce.
Negotiate More Bang for the Buck:
How can you be sure the coverage you choose will provide the
protection you and your employees need?
Let’s look at the essentials.
Adequate income protection: Policies use a variety of
definitions of disability. Some
policies state “an employee is considered disabled if he/she is
unable to do any occupation.” These
types of policies are a waste of money because a policy that pays only
if an individual can’t do any occupation is no insurance at all.
An engineer, for example, will not be paid any benefits if,
after a disability, he/she can stuff envelopes or other type of
minimum-wage job. This is
not income protection.
for a policy with an “own occupation” clause that pays benefits if
the employee cannot do the job he/she was educated and trained to do.
It should contain a residual benefit clause that makes up for
any loss of income if the employee can do some type of work but
suffers a loss of income. A
residual benefit clause, if truly honored by the insurer, offers a
win-win benefit for all three parties: the disabled employee returns
to the workforce in perhaps a lesser-earning capacity, with lost
income partially replaced by the policy; the insurer’s payouts are
reduced; and the employer retains a good employee.
Job retraining assistance and workplace
modification payments: Negotiate for a policy that
motivates and helps the employee rebuild his or her life after a
disability. It is in
everyone’s best interest for disabled employees to become as
financially self-sufficient as possible and for the company not to
lose its investment in these employees.
Tax protection: If premiums are paid by the
employee, benefits will not be taxable to him or her; if paid by the
employer, the employee will pay taxes on benefits.
Taxes can reduce monthly disability checks by 30-40%.
Consult a tax attorney to set up the best plan.
Adequate duration of coverage: Employers may opt to offer
short-term and long-term disability coverage.
For someone who is severely disabled, a long-term policy that
pays only for a limited time, such as two years, offers little
long-term policies that pay benefits up to age 65 or retirement age
under Social Security.
No “differential review standard:”
Negotiate to keep “differential review standard” out of the policy
your company purchases so that your employees retain the right to a
complete review of their cases by the federal courts, if necessary.
If you aren’t an attorney who specializes in
employer-sponsored disability insurance cases, these words may not be
meaningful to you, but to the courts and the claimant in ERISA-governed
disability insurance disputes, these words make a world of difference
in the type of consideration the case will receive.
preempts (prohibits) the employee from the following justice system
rights: state court appeals, jury trials, awards of punitive damages,
actual damages, and in most cases, attorney fees in disability
insurance disputes. Therefore,
insurers have nothing to lose if they renege on their policies.
a policy that specifies a differential review standard, in disputes
that escalate to the federal courts, the judge will not look at the
facts of the case but merely determine if the insurer had some basis
for denying or canceling benefits to the claimant.
Any trumped-up reason will suffice.
This is a grave miscarriage of justice.
Teach Your Employees to Protect
Themselves: Education is the
key to minimizing the impact of disability on your company and its
employees. Here’s a
checklist of ideas:
Distribute a copy of the actual
disability policy to employees.
many company executives and human resource managers have never seen a
copy of the actual policy themselves!
Employees need to know the definition of disability, how
pre-disability is calculated per the policy (commissions and bonuses
may not be included), what percentage of pre-disability earnings will
be paid, how long benefits will be paid, and what types of
disabilities are excluded or other limitations in the policy.
Educate your employees about the
statistics on disability.
If your company offers
different levels of coverage, such as 40% and 60% of earnings
coverage, emphasize the advantages to your employees of having the
extra coverage for what is typically a minimal extra cost.
Educate your employees about each type of
disability coverage and the inherent gaps in each.
Compensation covers only on-the-job injuries and illnesses, but it
doesn’t cover all employees or injuries (that is, it doesn’t
cover contract workers or injuries incurred while commuting).
Security Disability Insurance (SSDI) benefits
require claimants to 1) have contributed sufficiently to the Social
Security trust fund (typically, 10 years), and 2) prove that they are
unable to do any work that exists in the U.S. economy. More than
half of the individuals who apply for Social Security disability
are denied coverage and, if approved, the payment amounts of
$500 to $2,000 per month may be inadequate. Social
Security does not provide the disability safety net most
disability insurance plans
provide 24/7 protection, but unlike COBRA medical benefits, coverage
terminates when an employee leaves the company.
Also, due to policy limitations and ERISA legal recourse
restrictions, this insurance may not pay as much or as long as
disability insurance policy provides the most dependable,
long-term protection possible because it offers complete legal
recourse if the insurer reneges on its policy terms.
A private policy must be purchased, however, while the employee
is still healthy.
The Bottom Line:
Disability insurance is far more valuable than most employers or
employees realize and educating employees is essential. While
you want to provide income protection for employees who suffer a
severe disability, it is just as important to provide employees with
lesser disabilities with information on all of their options before
they choose to go out on disability leave. Since disability
can strike without warning, it’s essential for you, your company,
and its employees to be prepared ahead of time!
Read other articles and learn more about
Lazo and Carol J. Amato.
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