Let’s Talk Disability Insurance

A loss of income due to an expected disability can be devastating. Group disability coverage is an affordable way to help your employees manage their finances and can even help them get back to work faster. Here's what you need to know.

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When most Americans think of disability insurance, they think, and rely on, Social Security Disability Insurance (SSDI). However, few people realize that the program is only intended for disabilities that are expected to last at least 12 months or are expected to result in death. Other impediments are the waiting period for coverage (5 months) and in many cases the extremely long determination period (in some cases the SSDI review can take years). Private disability insurance can provide a higher benefit, a less stringent definition of disability, and quicker disability determination. Group-sponsored disability insurance helps to make income protection coverage more accessible to millions of Americans. Unfortunately, according to the Bureau of Labor Statistics, fewer than 45% of employees have access to short term disability coverage through their employer, and fewer than 35% have access to long term disability.
 
Disability by the Numbers
While they do not tell the whole story, statistics do provide a backdrop of why disability coverage is crucial. Did you know:

• 5.6% of working Americans will experience a disability of 6 months or less due to illness, injury, or pregnancy on average every year; ¼ of these will last 2 ½ to 6 months
• Only 48% of American adults estimate they have enough savings to cover three months of living expenses if they are not earning any income
• From 2006 to 2015, only 34% of Social Security Disability Insurance (SSDI) claimants had their applications approved, with 1/3 of these receiving approval only after appeal
• The average SSDI benefit as of January 2018 was $1197 per month

 
Disability Insurance Defined
Simply put, disability insurance is income protection in which the insurance company provides a percentage of a person’s salary to them in the event of a disability. Disability policies are broken into two categories: short term and long term. Short term disability coverage usually begins on the date of disability or shortly thereafter, and continues for a limited duration. Although some policies deemed “short term” can continue to pay benefits for up to two years, the typical short term policy lasts between three and six months. Long term disability coverage usually begins 90 or more days following the start of disability and can continue for a number of years or through to normal retirement age. 

MOST COMMON REASONS FOR DISABILITY CLAIMS

Short-term disability claims	Long-term disability claims
25% pregnancies	29% musculoskeletal disorders (back, knees)
20% musculoskeletal disorders (back, knees)	15% cancers
8% digestive disorders (hernias, gastritis)	9% pregnancies
8% mental health issues (depression, anxiety)	9% mental health issues (depression, anxiety)
​8% fractures, sprains, and strains	9% fractures, sprains, and strains

Group Disability Insurance
Group-based plans, whether paid by the employer or offered on a voluntary employee-paid basis, typically provide 50%, 60%, or 66 2/3% of a person’s pre-disability salary in the event of a qualified disability. Premiums are based on a number of factors, including employee ages, genders, job titles, and salaries, plus the employer’s industry and locations. Interestingly, the monthly cost for employer-paid short term disability is often very similar to that for a long term disability policy, with the average cost per employee well below $50 per month for each plan. Employer-paid disability is offered at a steep discount from individual or group-sponsored voluntary policies, since all eligible employees (as defined by the employer) are enrolled on the coverage. Like with group life coverage (which we discussed in our last blog), if the employer-sponsored plans have a higher level of coverage available over and above a Guarantee Issue amount, there are only a few health questions asked of enrollees – no physicals, no lab work.
 
Enhance Your Group Disability Plan
Like I always say, contract details matter. If you’ve never read through a group disability contract, I recommend you grab a few of your clients’ policies (both short and long term disability plans) and peruse them.
 
Benefit provisions to watch for in long term disability contracts:

• Definition of Disability – A contract’s definition of disability will determine when a person’s disability will no longer qualify for benefits.
  • “Own Occupation” is the standard definition, which allows a benefit to be paid until the insured is able to return to their own, or  similar, position
  • “Any Occupation” casts a broader net, such that a person will continue receiving benefits only if unable to work in any occupation for which they are qualified
  • “Own Specialty” is included for certain professions (such as surgeons, dentists, and attorneys) that allow disability benefits to continue even if the insured can return to work, but is not able to work in their specialized field due to their disability
• Benefit Duration – This provision indicates the maximum amount of time the carrier will pay benefits in the event of a qualified disability.
  • “To Age 65” – Benefits will continue until the disabled member reaches age 65, although most contracts will have an extension depending on the member’s age when first became disabled
  • “To Social Security Normal Retirement Age” (SSNRA) – Benefits will continue until the disabled member reaches their retirement age under Social Security. Since anyone born after 1937 will have a later retirement age than 65, most contracts should be converted to SSNRA language
  • “XX Year” – Contracts with a flat number of years’ benefit duration will provide income protection only for that amount of time, regardless of the disabled person’s age or eligibility for SSDI
• Maximum Duration for Certain Conditions – Most policies limit disabilities due to mental health or chemical dependency to a 24-month benefit, while some also include limitations on “specified conditions” – review each client’s contract to determine their specific limitations.
• Infectious/Contagious Disease Rider – Generally seen only in the healthcare industry, this contract enhancement provides disability benefits when an employee is not able to work due to exposure to a disease (such as measles, meningitis, etc.).
• Loss of ADL Rider – Activities of Daily Living (ADL), such as bathing, feeding oneself, and dressing, can qualify the insured for an additional benefit (usually 10%) over and above their disability benefit percentage and maximum. The contract will spell out what the carrier defines as an ADL, and how many ADLs would need to be lost in order to qualify.
• COBRA Premium Payment Rider – One of the newer enhancements available, the COBRA rider provides an additional flat dollar monthly benefit, typically for up to 18 months, to help an insured pay their medical premiums during disability. 

 
Items to look for under both short and long term disability policies:

• Offsets – The insurance program will reduce benefits payable by other sources of income that the disabled person receives. This can include Worker’s Compensation, Social Security Disability benefits, State Disability benefits (such as the new WA Paid Family & Medical Leave benefit), and sick/paid time off.
• Salary Continuation – This provision removes sick and paid time off proceeds from the list of income offsets. This is an important provision since an employee would be able to use sick or PTO to supplement their loss of earnings under the disability plan only if this provision were included.  
• Definition of Salary – Standard contracts define salary as “base salary” – if a client pays their employees bonuses and/or commissions, these need to be included in the contract’s salary definition.
• Rehabilitation – Rehabilitation can be voluntary or mandatory, with the goal of getting employees back to work faster. According to a RAND study, having a return to work program in place reduces the length of absences by 38% on average. 

  
Taxes
The government taxes group-sponsored disability plans – either the premiums or the proceeds. This is an important distinction, since paying tax on a $50 monthly premium is much more palatable than paying tax on a $5000 monthly benefit. If the plan being offered is voluntary, and the employee pays the premiums post-tax, then the proceeds will not be taxed. If an employer pays the premiums for their employees’ coverage, the benefit received by the disabled individual will be taxed as regular income. 
 
An employer-paid disability program can provide non-taxed benefits to a disabled individual – through an employer “gross up”.  Under this method, the employer deducts an employee’s monthly disability premium from their paycheck, after-tax. Then the employer adds the premium back into the employee’s paycheck. Under this arrangement, the employee is paying the tax on the premiums; therefore, they would not need to pay the tax on the benefit.  There are obstacles to be aware of when converting an existing plan over to a “gross up” program, but they are by no means insurmountable.
  
The Bottom Line
Other benefits professionals tout dental as second-in-line to medical coverage, but in my opinion, disability insurance should be the second program an employer adds to their benefits repertoire. Most people have insurance to protect their home, their car, and their toys, but may not have even thought about protecting their most important asset – their income. Group-based disability plans are much lower in cost than individual disability policies, plus they are easier to access on a group-sponsored basis, with no health exam or lab work required and typically no health questions asked. When obtaining quotes, you’ll need to provide additional census information (job description, base salary, bonus, commissions), and be sure to ask the carrier for added provisions, such as Own Specialty, as needed. As you hone in on the finalist carriers, ask for a sample contract to review – carriers tend to define things differently. As always, the devil is in the detail.

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