Group Long-term Disability Insurance: Policy Details Matter
| Sherri Watts and Andre Lukez
Do you know the details of your group long-term disability contract? Unfortunately, for many employers, this topic does not become important until an employee has filed a claim that results in the denial, termination, or reduction in the level of benefits.
With group disability programs, it is easy for employers to be blindsided by the most competitive premium rate without distinguishing the many variances between insurer contracts. Some questions to consider in evaluating a long-term disability policy include:
- What is the definition of disability?
- How does the pre-existing condition limitation apply?
- How is the level of disability determined?
- How long should the elimination period (waiting period) be?
- What is the claims management process?
- What additional options and features can be included?
Definition of Disability
The heart of a disability contract is the definition of disability. Terms such as earnings loss, any occupation, and own occupation, need to be understood.
A “typical” group long-term disability contract has a 24-month own occupation definition of disability after which the claimant is under the any occupation standard. Usually, any occupation tests whether a person can perform duties reasonably suited based on training, education, and experience. Seventy to ninety percent of contracts fall under these terms. But sometimes more restrictive any job language is in a disability contract which will limit the obligation of the insurer.
Variations and less common definitions of disability include:
Own specialty that is often part of a disability contract for certain specialists such as surgeons, engineers, or lawyers. This type of policy language enables a claimant to receive a benefit if they are unable to perform the duties specific to their specialized occupation even if another type of job could be performed based on their skills and training. Own specialty definitions will add a significant cost to the premium, are carefully underwritten, and are offered by a limited number of insurers.
Amount of Benefit
After an elimination or waiting period, the insurer will begin making disability payments. The amount of these payments will be impacted by percentage of earning definitions and maximum monthly benefit caps. Furthermore, the amount of payment will be impacted by loss of earnings and loss of duties definitions.
The amount of benefit will be impacted by the following contract terminology:
- Loss of duties AND income
- Loss of duties OR income
- Loss of duties DURING the elimination period and loss of duties AND income AFTER the elimination period.
- Offsets for other Income earned (for example, Social Security benefits and workers compensation benefits)
Usually, benefits are triggered when a claimant’s earnings decline by at least 20% of pre-disability income. Some policies may have a lost income threshold as high as 40%. Also, a policy may have a lost income provision that adjusts upward after the own occupationperiod ends. These provisions are found in the Gainful Earnings section of the disability policy.
Duration of Benefit
The majority of group long-term disability contracts provide benefits up to Social Security Normal Retirement Age (SSNRA). For those born in 1960 or later SSNRA is age 67. Variations in the duration of disability benefits exist and plan sponsors need to be keenly aware of potential limitations such as five-year maximum benefit duration language.
Disability contracts have limitations that will restrict the amount and/or duration of benefit payments. Common limitations include:
Mental/nervous: 24-month limitations usually apply.
Drug/Alcohol: 24-month limitations usually apply.
Self-reported symptoms such as back injury, headaches, pain, fatigue, dizziness, and fibromyalgia that cannot be proved by a specific test.
Partial or Residual Disability
Residual disability provisions encourage a disabled individual to return to work even if on a limited basis.
Under residual disability provisions, a claimant can typically earn up to 20% of pre-disability income and still be eligible for full benefits after the elimination period. In another scenario, a person already on claim can make an attempt to go back to work without negatively impacting the disability payment (subject to caps).
Pre-Existing Condition Clauses
These clauses can be confusing and are often misunderstood and overlooked. But a clear understanding of pre-existing condition clauses is essential to the evaluation of a long-term disability contract.
Following are examples of pre-existing condition clauses commonly found in disability policies.
3/12: The most common pre-existing clause. A 3/12 means that the policy will not cover any disabilities during the first 12 months after the covered person’s effective date of insurance that is caused or contributed by any sickness or injury for which the covered person sought treatment during the three months prior to the effective date of coverage.
3/3/12: With a 3/3/12, the additional “3” allows a claimant to have had a condition three months prior to the policy effective date, but be eligible for benefits three months into the policy period if they were treatment free for that period. With this provision, the policy is less restrictive but also more expensive.
Variations of the 3/12 and 3/3/12 provisions exist and should be reviewed carefully.
Other limitations include prudent person language under which it is assumed that a reasonably prudent person would have consulted a medical professional during the period prior to the policy effective date. Also, a pre-existing condition limitation may apply to conditions that were not formally diagnosed but were discovered or suspected during a routine physical exam. This last provision is difficult to administer and can lead to confusion and dispute.
Carrier Finances and Reputation
Sponsoring employers should only consider insurers with an “A” financial rating. Beyond the financial stability requirements, employers should consider the commitment the disability insurer has to the business. Are they an insurance company first? Or, are they a financial company that happens to be in the business of selling insurance. The philosophy and service model of the insurer will make a big difference in the overall customer experience.
Social Security and Other Offsets
Social Security Disability Income (SSDI) is the largest and most important offset to long-term disability insurers.
With SSDI, the amount a claimant is awarded is based upon the approval amount from Social Security. Most disability contracts offset insurance company payments with those received from SSDI. Therefore, it is in the interest of insurers to assist in facilitating the application and approval process as any payments received from SSDI will offset payments from the insurer. In fact, claimants are required to cooperate in this process if they are to continue receiving benefits.
The SSDI application process is not fast. The average time from submission to approval for SSDI is about 18 months. But ultimately 75% of submissions are denied.
Another standard provision is full family SSDI. With full family, the insurer will offset any Social Security Income being received by other members of the family. Primary only offsets are available but add to the cost of the policy.
Other offsets include worker’s compensation payments, unemployment wages related to the disabling condition, retirement / pension plan payments for a disabling condition, increases to veteran’s benefits, no fault auto insurance and individual disability policies.
Rehabilitation and Work Place Accommodations
Rehabilitation is considered a standard benefit in most contracts. But the quality of these services is not standard. Certain insurers have built solid reputations in helping disabled employees get back to work and to lead more productive and meaningful lives.
Many insurance companies have rehabilitation professionals who will determine if a claimant is eligible for the program and medically able to engage in a return to work program. Once this is determined, a customized written rehabilitation and return to work assistance plan will be sent to the claimant. This may include coordination with the employer to assist in the employee’s return to work, adaptive equipment or job accommodations to allow the employee to work, job placement services, resume preparation, job seeking skills training or education and retraining expenses for a new occupation. Many insurers will pay an additional benefit as an incentive to return to work. Benefits usually end on the date the insurer determines that the claimant is no longer eligible to participate or any other date on which monthly payments would stop in accordance with the plan. Some insurers go so far as to offer relocation assistance and childcare benefits to promote involvement in rehabilitation.
Claimants who refuse recommended rehabilitation treatment or choose not to apply for Social Security Disability Income can be denied their benefit payments.
Long-term disability proposals will often include an array of additional features to enhance the contract. Some of these “additional features” have become somewhat standard. These include:
Waiver of Premium. Waiver of Premium rider is a clause in an insurance policy that waives the policyholder’s obligation to pay any further premiums should he or she become seriously ill or disabled. The waiver is usually associated with life insurance policies, and requires the policyholder to be disabled for a specified amount of time, such as being incapacitated for six months. This allows a claimant to benefit from an insurance policy, even when they are unable to work.
Additional options are available to purchase that will enrich the standard contract although will be represented in the cost of the disability plan. Those options are:
- Survivor Income Benefit
- Conversion Privilege
- Cost of Living Adjustment (COLA)
- Catastrophic Disability Benefit
- Presumptive Disability Benefit (Accidental Dismemberment & Loss of Sight)
- Family & Medical Leave Extension
- COBRA Continuance Premium Benefit
- Spouse Disability
- Progressive Disease Rider
- Accelerated Survivor Benefit
- Extended Earnings Protection Benefit
- Pension Contribution Benefit
- Business Protection Benefit
Pre-Tax or Post Tax?
The taxability of long-term disability premiums and benefits is an important consideration.
Generally, when the employer pays the premium, disability benefits received by a claimant are included in the gross income. Alternatively, if the employee pays the premium on a post-tax basis, disability benefits are not included in gross income. Some argue that the small amount of tax paid on premium by an employee is a worthwhile tradeoff given the significant tax benefit in the uncertain event of a disability.
Variations of pre and post-tax approaches are available and should be considered as part of a broader disability plan strategy.
Owners in partnerships, S corporations, and LLC’s will be taxed on their disability premiums. But in the event of disability the benefit payments are not included in gross income.
Billing, tax reporting, claim submission, and claims management are often ignored or minimized in the initial selection of a disability insurer. But wide variances exist in terms of service quality and resource capability. When reviewing administrative services areas to review include:
W-2 preparation and reporting: Is the insurer calculating the employer and employee portion of Social Security and Medicare taxes and is the insurer handling deposits to the IRS? Are W-2 forms prepared and mailed to disabled employees? And, if needed, how well does the disability insurer coordinate tax reporting with the inforce payroll vendor?
Billing options: Are premium remittances handled through a “list bill” or self-administered billing? How are adjustments from employee changes, additions or terminations handled?
Selecting a group long-term disability policy is much more than a spreadsheet exercise. Though long-term disability claims are infrequent, the ramifications of an improperly vetted contract can be profound. If you haven’t already done so, we recommend a line-by-line review of your inforce policy using the guidance of an experienced and qualified employee benefits advisor to determine if the provisions are in alignment with expectations and benefit philosophy.