Group Disability Insurance

Disability insurance has become an increasingly valuable part of a comprehensive employee benefits package. Not only does disability insurance fill the gaps in financial protection offered by programs like Social Security, but it is also a highly sought- after component of a competitive benefits package to help employers attract and retain talented employees.

And, while employees appreciate the peace of mind they get from income replacement benefits, employers can use the resources offered by insurers to manage time and productivity losses and find the most effective ways to return employees to work.

Employer-Sponsored Disability Insurance

Employer-sponsored disability insurance coverage is an important benefit for every employee. The inability to work due to disability can be devastating for an employee and their family. Employers can help protect against that risk by providing group disability income insurance — a group insurance product that provides income replacement benefits to an employee should they become sick or injured and unable to work.

Disability insurance protects workers and their families against financial catastrophe by replacing their income and helping them to maintain their standard of living. Disability insurance pays a percentage of pre- disability income if an employee is unable to work due to illness or injury for a period of time. Employers may offer short-term disability coverage, long-term disability coverage, or integrate both short- and long-term disability coverage.

Short-Term Disability Coverage

Short-term disability (STD) coverage pays employees a percentage of pre-disability income— typically 60%—once their sick leave has been exhausted. The duration of STD coverage varies but is typically not more than six months.

Conditions that may trigger payment of STD benefits include pregnancies, strains, sprains, and minor surgeries. These conditions typically resolve quickly, and employees usually are able to return to work before the benefits are exhausted.

Long-Term Disability Coverage

Long-term disability (LTD) insurance provides income to workers whose earnings are interrupted by lengthy periods of disability. Long-term disability benefits usually begin when sick leave and short-term disability benefits are exhausted, and typically replace about 60% of pay. LTD benefits can continue for anywhere from five years to age 65.  LTD generally protects against the effects of a catastrophic illness or injury, but claims are often a result of chronic medical conditions that worsen over time (e.g., heart disease, hypertension, and diabetes).

I already provide workers’ compensation coverage. Doesn’t it help?

Not if the employee became ill or was injured in a non-work setting. Workers’ compensation is state-mandated insurance that covers both lost income and medical expenses for work-related illnesses or injuries. Workers’ compensation cannot help for injuries or illnesses that occur outside of work. This is where STD and LTD come in.

Why Provide Disability Insurance?

Disability insurance is both an employee benefit and a resource for employers to better manage the risk of illness and injury. The rehabilitation and management tools provided by most insurers can yield significant savings to employers. While helping your employees avoid financial disaster, disability insurance also helps you mitigate the losses caused by worker disability, such as the expense of replacing disabled workers and the impact on productivity.

These issues are especially harmful to a small business, where the absence of just one key employee can have a lasting impact on productivity and may even threaten the day-to-day operations of the business.

Issues to Consider

Benefit Selection and Funding

Ideally, employers should offer an integrated STD and LTD package. This allows for claims experts to be involved early and find the best ways to return a person to work as quickly as possible. Short-term and long-term disability insurance can be obtained from a single insurer. STD and LTD premiums can be fully-paid by the employer, cost-shared with the employee or offered as an employee-paid voluntary benefit. Employers often fund a basic plan to protect employees.  Employees may then purchase supplemental coverage to better address their individual needs.

Coordination of Benefits

Larger employers often provide a disability program that includes STD and LTD benefits as well as other health and welfare benefits, such as group health insurance and workers’ compensation. Smaller employers that may have little or no HR department need a more turn-key plan that provides effective employee communication and customer service to easy integration with other benefits.

Plan Components

A variety of key plan components have a direct impact on how claims will be paid and the cost of the plan.

• Waiting or “Elimination” Period – A plan’s waiting or elimination period is the period between disability onset and the point at which disability benefits become payable. STD benefits may have different waiting periods for illness and injury (e.g., a 7-day waiting period for illness and no waiting period for injuries). However, a typical waiting period for STD benefits is 15 days. Waiting periods for LTD plans usually start 30 to 180 days after the disability occurs. All coverage should be coordinated to ensure that long-term disability benefits start immediately after any sick pay and short-term disability benefits have been exhausted.
• Definition of Disability – Short-term disability plans typically provide income when an employee is unable to work in his or her “own occupation” due to injury or illness. Long-term disability plans provide income when an employee is unable to work in his or her “own occupation” or unable to work in “any occupation” for which he or she is suited by education, training, and experience.

Typically, plans use the “own occupation” standard for an initial period—usually two years, although longer periods are available.  During the “own occupation” period, benefits are paid if the employee cannot perform the essential work functions of the occupation in which he or she was employed. The “own occupation” period can then be followed by the broader “any occupation” standard. Under this standard, a plan would continue to pay benefits only if the employee was unable to perform any job functions for which he or she might be qualified based on education, experience, or training.

• Residual or Partial Disability – Residual or partial disability benefits provide a reduced benefit to employees who can return to work, but on a part-time or otherwise limited basis.  The partial payments offset earnings loss while the employee makes the transition back to full-time employment.
• Income Replacement – These plans typically replace 50% to 60% of income, although many carriers now offer up to 80%.  A typical weekly maximum benefit for STD policies is $1,000, while LTD policies may provide up to a $10,000 monthly benefit. Plans should be structured to balance financial assistance in a time of great need with incentives for the employee to return to work.
• Benefit Integration – Most group plans assume that disability benefits or payments from other sources (SSDI, workers’ compensation, etc.) may be paid to the employee.  As a result, most STD and LTD programs reduce STD and LTD benefits by the amounts paid by other sources. This provision is vital to ensure that return-to-work efforts are not compromised because the disabled worker earns more while he or she is disabled than while actively working.

Employees Can’t Count on State and Federal Programs

Your employees may believe that the state or federal government will provide the necessary financial help if they become disabled. Some assistance may be available, but it will probably not be adequate to accommodate the needs of their family for an extended period.

Most U.S. workers participate in the federal Social Security program and are familiar with the retirement benefits it provides. The Social Security Administration also administers disability benefits under the Social Security Disability Insurance (SSDI) program.

An employee’s salary and the number of years he or she has been participating in the Social Security program determine how much he or she can receive under the SSDI program. SSDI has a strict definition of disability and so benefits are difficult to qualify for, with about only 40% of those that apply for SSDI benefits qualifying. According to the SSA website, the application process takes 3 – 6 months.

• The standard to qualify for SSDI is more stringent than for most private plans. A person must be unable to engage in “any substantial gainful work which exists in the national economy.” This contrasts with private coverage which usually defines disability as the inability to do one’s “own occupation” or an occupation that matches training, education and experience.
• The SSDI definition of disability also requires that a person be severely disabled. The person’s inability to perform work must result from a condition that is expected to result in death or that has lasted (or can be expected to last) for a continuous period of not fewer than 12 months.
• SSDI does not provide full coverage for all workers. A worker has to build a work and earnings history to be fully covered by the SSDI program, leaving younger workers with added exposure.
• Some states offer short-term disability protection, but both SSDI and state-funded programs provide limited disability income protection to individuals who qualify for the benefits. And they are only the most basic safety net. In most cases, they will not provide adequate financial support to maintain a worker’s pre-disability standard of living.

For more information on group disability insurance or help with your employee benefits, contact a Health Professional at RMC today at 239-298-8210 or [email protected].