Group long-term disability insurance: Beware of the deficiencies

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 Omissions, misstatements, or fraudulent statements, can cause a claim to be denied or a policy to be rescinded.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.