This is the eighth article in an eight-part series, discussing disability income insurance. The rest of the series, along with other articles by Mr. Schneider can be found here.
Is your employer really doing you a favor by providing you with group long-term disability (LTD) insurance coverage? You bet … maybe. Most employees wouldn’t have coverage at all, if it weren’t for the fact that it was a company-paid benefit, because most employees either can’t afford it, or they don’t believe they will ever become disabled! But, are the employees really being done a favor? Perhaps not, and if more employers really knew of the many deficiencies these group plans have which can even affect themselves, they might think twice and look at some other options. (5 reasons to get started in the DI market)
Underwriting (what information is needed to issue a policy)
Typically, underwriting a group LTD application is easier than underwriting individual plans, which are more involved, due to all of their guarantees and liberal wording that allows a claim to be paid under more circumstances, scenarios and conditions.
Group plans have less underwriting because if the claims experience of the carrier becomes too high (thus reducing their profitability), one of two actions can result: 1) the group gets canceled or, 2) the rates are raised. Not good. On the flip side, group coverage can be desirable especially if an employee is either uninsurable, or has a pre-existing condition that would normally be excluded from coverage under an individual plan.
However, a word to the wise in connection with pre-existing conditions: When applying for any type of coverage, since a claim begins with the application, the applicant must fully disclose all pertinent information. Omissions, misstatements, or fraudulent statements, can cause a claim to be denied or a policy to be rescinded. I know this first hand, because over the years, I have been called in as an expert witness/consultant in dozens of lawsuits to help insureds overturn inappropriately denied claims.
Policy wording (governs the outcome of a claim)
Definition of total disability – Generally speaking, definitions, terms, and conditions in an individual policy, are more liberal and can provide a true own-occupation definition of total disability (this means one could work in another occupation and still be paid benefits) vs. most restrictive and split definitions found in group plans.
For example, depending on the occupation classifications of the group, some of the following definitions might be offered: Own-occupation for 2-5 years; thereafter not working in any occupation, or unable to work in any reasonable occupation based on education, training and experience. That means after the initial period of time (2-5 years), in order to continue to collect benefits for the remainder of the benefit period (which might be to age 65), the claimant must be unable to work in any occupation given the aforementioned!
Mental and Nervous – These subjective health conditions are only covered for two years with all group plans. Some individual plans treat this disability like any other sickness and will pay benefits for the full benefit period. And others also restrict the period to 2-5 years depending on the carrier.
Portability (can the employee take the coverage elsewhere)
When an employee leaves the group, or a member leave the association, normally coverage terminates.
Guarantees (refers to rates and renewability)
Renewability – There are several forms of contract renewability – obviously, guaranteed renewable or conditionally renewable found in individual plans are the best, and without exception, both of these features are noticeably lacking in all group plans (otherwise they would be aggressively underwritten and would be higher in cost!).
Premium – Only individual coverage offers guaranteed rates. If group rates were guaranteed, the cost would be much higher. Group rates can and will be increased anytime and will also change as the average age of the group increases.
Participation (how much of salary will be covered)
Usually coverage is 60% (can go as high as 70%) of salary (bonuses are usually excluded) with a maximum (cap) benefit amount of $5,000.
Caps will then cause a “reverse discrimination” situation for most highly compensated employees whose incomes are beyond $100,000. When executives earn $200,000, for example, they will still only get $5,000 (not $10,000) and therefore are only being compensated at 30%!
Offsets (reductions to the benefit amount)
Standard offsets, or reductions to the benefit amount payable from all, or most 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, 4) other disability income policies. However, there are some carriers who do not have this last offset (an option), and instead charge a higher premium.
Taxation of benefits
Benefits payable under an employer-paid group plan will be taxable, whereas plans which are paid by the employee are tax-free. However, that being said, there are ways to circumvent this employer-paid taxable event, i.e., to have the premium paid by the employer and still have the benefits tax-free!
What can be done to “fix” some of the aforementioned group plan deficiencies? The easiest “fix” is to correct the “reverse discrimination” problem and the way to do that is to either have the employer provide a tax-free individual plan for the full amount or to provide a tax-free individual plan to supplement the taxable coverage. What about the remainder of the deficiencies, like portability, renewability, guarantees, etc.? Unfortunately, there’s no cure for these inherent deficiencies of all group plans. These deficiencies can hinder a claim and thus constitute the “low cost.”
Larry Schneider is a disability specialist with over 35 years experience and is the owner of Disability Insurance Resource Center. He is also an expert witness consultant for disability insurance claims which have been inappropriately denied and a national resource for hard to place prospects, as well as a brokerage for standard cases. One of the author’s divisions has developed a Sales and Marketing Turnkey System, made up of eight manuals and other sales aids, each devoted to one segment of the sales cycle (prospecting, rebuttals, etc.). You can contact him at (800)551-6211, by e-mail at [email protected], or by visiting his Web site at www.di-resource-center.com.