Is an employer really doing his employees (or himself for that matter) a favor by providing them with employer-paid group long-term disability (LTD) insurance coverage?
You betcha, maybe!
Most employees wouldn't have coverage at all if it wasn't for the fact that it was a company-paid benefit, because most employees either can't afford it, haven't recognized it as a real need, or they don't believe they will ever become disabled (Consider: foreclosures are three to four times higher due to disability than due to death). But, are the employees really being done a favor? Perhaps not, and if more employers really knew of the many deficiencies of these group plans, which can even affect themselves, they might think twice and look at some other options.
Note: This article makes more mention of group plans than association plans, due to the fact that most group plans are more consistent with each other in terms of deficiencies, as compared to plans offered by associations which could have more variations.
Underwriting
Typically, underwriting a disability insurance application, either for group LTD or association coverage is less involved (and coverage can sometimes even be issued on a guaranteed basis) when compared to underwriting individual plans. Individual plans require much more underwriting (health, financials, duties, etc.), due to the guarantees and liberal wording in the contract, all of which allow a claim to be paid under more circumstances and conditions.
On the other hand, some of the reasons why group/association plans are more "forgiving" and have less underwriting, is because if the claims experience of the carrier becomes too high (thus reducing their profitability), one of two actions can result: a) the group or the association plan can get canceled by the carrier, or b) the carrier raises the rates (which are not guaranteed like individual plans). Neither of these two scenarios are a pretty picture.
On the other side of the coin, coverage might be issued on a guaranteed basis by group/association LTD plans and this can be a very desirable element, especially if an association member or an employee of a company that is applying for group coverage is either uninsurable, or has a pre-existing condition that would normally be excluded from coverage as it would under an individual plan.
However, a word to the wise in connection with pre-existing conditions when applying for any type of coverage: Because a claim begins with the application, the applicant must fully disclose all pertinent information on the application. Omissions, misstatements or fraudulent statements can cause a claim to be denied or a policy to be rescinded. I know this firsthand, because over the years, I have been called in as a claims expert witness/consultant in dozens of lawsuits in order to help claimants overturn inappropriately denied claims.
Policy wording
Definition of total disability: Generally speaking, all definitions, terms and conditions in an individual policy are more liberal and can provide a true own-occupation definition of total disability (e.g. even if you are working, so long as it is in another occupation, benefits will still be paid for the full benefit period) vs. the restrictive and split definitions found in most group and association plans.
Depending on the various occupation classifications of the group, the following definitions for total disability might be offered: own-occ for two years or five years (initial period), thereafter the definition changes to: not working in any occupation, or unable to work in any reasonable occupation (given education, training or experience). What that means is that after the initial period of time has expired, in order to continue collecting benefits for the remainder of the benefit period (which might be to age 65), the claimant must be unable to, for example, "flip hamburgers," or not be working at all.
These split definitions give the carrier some form of control of the claim and help to keep premiums low.
Mental and Nervous: These subjective conditions are only covered for two years with all group plans. For now, some individual plans are treating this condition like any other sickness and will pay benefits for the full benefit period. However, there are more carriers who also limit this type of disability to two years, and some even offer a shorter benefit period as an option, in order to lower the premium.
Portability
This is a serious deficiency of both group LTD and association plans. There is no portability at all! If a member leaves the group, or is longer in good standing with the association, coverage terminates. Individual plans have no such limitations.
Guarantees
Renewability: There are a couple of different contract types. Obviously, guaranteed renewable or conditionally, found in individual plans, are the best, and without exception are noticeably lacking in all group or association plans. This means coverage can be canceled by the carrier. Otherwise, they would be aggressively underwritten and thus would be higher in cost.
Premium: Only individual plans offer guaranteed rates and once again, if group/association rates were guaranteed, the cost would be much higher than their initially published rates. I say "initially published" rates, because these rates can be increased by the carrier any time and group rates certainly will be increased as the average age of the group rises, while rates for association are usually age-banded.
Participation
Salary: Usually group LTD coverage is to a maximum of 60% to 70% of wages, sometimes including commissions, excluding bonus, along with a typical maximum (cap) benefit amount of perhaps $5,000, although it could be higher. Word of caution here: Be aware that a $5,000 cap can cause a "reverse discrimination" situation for most highly compensated employees, e.g. those with incomes beyond $100,000. The reason I refer to this situation as reverse discrimination is because when executives earn $200,000, for example, they will still only get $5,000 (not $10,000, and as a result, they are only being covered for 30% of wages). Not too good, in view of the fact that it's hard enough living on 100% of income (see offsets)!
Bonus: This form of income, as previously mentioned, is not usually covered by LTD, and as a result, the insured (even those making less than $100,000) will not receive their full 60% of coverage.
Offsets
Standard offsets or reductions to the benefit amount payable from group plans are: (1) Workman's compensation; (2) Social Security disability; (3) benefits received under a retirement plan which has been triggered prior to the retirement date; and (4) other disability income policies. However, there are some carriers who can delete the aforementioned offset. Those who do charge a higher premium for this option.
Note: Employer-paid group coverage plans will be taxable. However, there are ways to circumvent this taxable event -- to have the premium paid by the employer and still have the benefits tax-free! I will be pleased to let you in on this little secret for the asking.
Conclusion
What can be done to fix some of the aforementioned group coverage deficiencies? The easiest fix is to correct the "reverse discrimination" problem. The way to do that is to either have certain classes of employees "opt out" and then have the employer provide a tax-free individual plan for the full amount that the employee is eligible for; to provide a tax-free individual plan to supplement the taxable group coverage; or, to raise the cap, if that is economically feasible.
That takes care of the "reverse discrimination" and the "taxable" issues. What about the remainder of the deficiencies -- portability, rate guarantees, etc.? Unfortunately, there's no cure for these inherent deficiencies and make up the reasons for the initial low cost.
However, in view of the low-cost advantage of group plans, a small group that has a minimum of turnover may be ultimately better off by going with an individual plan, even in view of the fact that these never-increasing premiums are initially much higher.
Get your DI questions answered by an expert
Unclear of the definition of "total disability" or don't know if the client's DI premium can be treated as a business expense?
Longtime disability income insurance specialist Larry Schneider has graciously agreed to respond to DI questions from readers, with certain insightful questions and answers ending up in a future issue of Life Insurance Selling.
All you need to do is submit your question directly to Larry Schneider via e-mail to info@di-resource-center.com.
You'll get your answer, and your inquiry and the subsequent response may end up helping other burgeoning DI producers who read the magazine.
Larry Schneider, with over 35 years of experience, owns and operates one of the nation's largest brokerages exclusively specializing in disability income insurance (including hard-to-place). He is a nationally recognized lecturer and has written numerous articles for all of the major trade magazines. One of his divisions offers expert witness/consultation to rebut and overturn inappropriately denied claims. Reach him at 800-551-6211 or visit www.di-resource-center.com.
