Group long-term disability coverage is the best bargain available in the insurance market today, but it is also one of the most difficult benefits for producers to understand.
Product knowledge is important in the group LTD market because the key to providing a solid disability plan lies in knowing the contract inside and out and in clearly identifying the contract’s benefits and limitations.
The best solution is to work with a committed carrier that specializes in group disability and an expert carrier rep who can guide you through the process of properly designing an LTD plan. But here is a brief overview of the topics that may come up when producers are talking to group LTD carrier reps.
The issuers of all LTD contracts have the same aim–providing a benefit for insureds who become totally or partially disabled. However, the construction of LTD contracts varies widely from carrier to carrier. Many different approaches to organizing and describing benefits have emerged. The differences lead to the presence or absence of restrictive definitions and benefit limitations that, in turn, affect contract costs.
Because of these variations, LTD contracts are best understood by reading them in their entirety and not by comparing their components. In fact, trying to line up LTD contracts component to component can be particularly frustrating. Language that seems quite similar on the surface can reflect significant differences in how benefits are paid. Likewise, wording that looks quite different can, after closer examination, turn out to yield identical benefits.
Understanding contract language is critical to understanding how the choices made affect what is covered and, more important, what is not covered.
Plan designers can take at least 3 approaches to controlling costs: limiting benefits, providing incentives for employees to return to work as soon as possible, or offering a combination of benefits limits and return-to-work incentives. When recommending one of these 3 approaches, the producer needs to consider how that approach will affect the coverage.
A common way to limit benefits is to choose a plan with more restrictive definitions of disability and to shorten the benefit period for common and difficult-to-manage disabilities, such as musculoskeletal disorders. Typically, these restrictions are added to a plan otherwise appearing to offer full-featured benefit percentages and plan maximums. This approach might create the perception that employers are offering true long-term protection when what they really are doing is buying less insurance by creating gaps in coverage.
Buying less insurance is a legitimate way to reduce costs if the client understands how the decision affects the ultimate benefit. When, for example, companies decide to buy less group term life insurance, the implications are clear. Instead of buying a $50,000 life benefit, companies may choose a $25,000 benefit. All parties involved can see how the decision to buy less life insurance affects the insured.
With group LTD, however, the decision to buy less insurance by manipulating definitions and limitations creates a situation where no one can predict how and for whom the decision will play out. While the schedule page may say the benefit period runs to age 65, if the disability is due to a condition limited by the contract, such as musculoskeletal disorders, benefits may stop after only 2 years.
Even without restrictions and limitations, a full-featured LTD plan is still a huge bargain in the benefits market. A careful review of the options available may demonstrate that the money saved with a more restrictive contract may not, in fact, yield good value. If lowering the cost of an LTD plan is a must, it would be wiser to choose a contract with fewer limitations and opt for lower benefit percentages or plan maximums. This will increase the likelihood that any given claim will be paid and that everyone will understand how the cost decisions affect the benefits.
There are also important basic contract provisions that must be constructed properly to ensure that the LTD plan will work as intended, and 2 of the most critical are defining who is covered (eligible employee classes) and what is covered (the stream of income). These 2 definitions are mishandled frequently. Unlike benefit limitations, this is generally not due to different carrier approaches. All good LTD carriers will offer the language necessary to get these provisions correct. Rather, the problem results from the producer’s lack of understanding about what to look for while setting up a plan.
In defining eligible classes, it’s important to avoid vague descriptions such as “management” or “executives.” These can lead to misunderstandings about who is eligible for what benefits–a problem that will not likely surface until claim time.
LTD contracts promise to pay a percentage of earnings if someone becomes disabled. Because the definition of “earnings” is so important, it is vital for plan designers to write a clear definition of what is included and excluded from the word “earnings” when that word is used in the contract.
For example, it’s common to find plans in which the employer believes bonus income is covered. The employer may even include bonus income in the census reports, even though the contract states that bonuses are excluded from covered income. Obviously, this type of misunderstanding can create serious problems when a claim is made. This is where working with an expert carrier rep can help producers and employers avoid pitfalls.
Len Cavallaro is senior vice president of sales and marketing at Jefferson Pilot Financial Insurance Company, Greensboro, N.C. He can be reached at: email@example.com.
Because of variations from company to company, LTD contracts are best understood by reading them in their entirety and not by comparing their components