Group Disability Programs: The Original Paycheck Protection Programs
An often overlooked and misunderstood employee benefit is one that can offer serious financial protection and is VERY affordable compared to more expensive benefit programs like health insurance. Also referred to as “DI” in our industry, disability insurance is not flashy or something that you will use on a day-to-day basis like many other benefits. If you ever require it, you will be so happy that your employer made it available.
In its simplest and easiest to understand form, disability insurance is paycheck protection. If someone becomes sick or seriously injured and cannot work for an extended amount of time, what normally happens? They use up their PTO, and checks stop. You’re living off your savings account, now what? Bankruptcy, couch surfing time? Worst-case scenario, right?
There are various reports available, but they will tell you that the #1 cause for bankruptcy is medical debt/medical bills. A quick Google search, and depending on the source you choose, most reports will tell you that anywhere from 51-67% of all bankruptcies are due to healthcare-related costs. I would personally extend that further and say they are due to healthcare costs AND the lack of disability insurance.
Disability insurance, as mentioned, is paycheck protection. Take that same scenario from above, except that the same employee has short-and long-term disability coverage from their employer. Employee A gets sick, cannot work, and has to stay home until the doctor says they can return.
For someone who has disability coverage, normally after they exhaust their PTO and company pay, there will be a waiting period anywhere from 1 day to 2 weeks depending on the purchased plan. Once employee A makes it through that waiting period, the short-term disability plan would kick in, starting to pay a weekly benefit of 60% of the pre-disability earning up to the plan weekly maximum (the % can vary based on the plan, but 60% is pretty standard). Most short-term plans will last for either 90 days, six months, or a full year. Most plans are set up to pay 60-65% of pre-disability earnings so that they dollar-wise end up being about what that employee was making from work after taxes.
If employee A remains out of work and exhausts the benefits on the short-term disability plan, the next step is Long Term Disability. Ideally, the short and long-term benefits are with the same insurance company.
So that the claim would transition seamlessly from the short-term disability plan to the long-term disability plan, benefits on a long-term program tend to be pretty similar to the benefits in a short-term plan, with a few exceptions. On a long-term disability plan, instead of a maximum weekly benefit, there is a maximum monthly benefit. Similarly, the benefits tend to get paid out monthly instead of weekly. Long Term Disability plan designs will vary from employer to employer and from insurance provider to insurance provider. Still, the great thing is that when these are getting set up, the employer, their broker, and the insurance company can partner together to come up with a plan design that makes sense for the employer and their employees alike. As with all benefits, there’s no one plan design or insurance provider that is the best fit for all scenarios, so you’ll want to customize and implement the plan that makes the most sense at that time for your company. Long Term Disability plans can have benefit durations in place from 2 years to 5 years and even up to social security / average retirement age. For a younger employee who may become disabled and forced to stop working, a long-term disability plan is one of the most beneficial things an employer can put in place, period. That plan can help employees keep food on the table and help them keep their bills paid, potentially for many, many years to come.
So, for those who like details and are looking to get creative on the plan designs, here are a few pointers by plan type.
Short Term Disability Moving Parts:
Elimination Period – Can range from 0 days to 14 days; one week is most common.
Weekly Benefit Maximum – The norm is $1500, but this can be dialed up or down to suit the population’s needs.
Benefit Percentage – Normally 60% but can be as low as 50% and as high as 65 or 70% with certain vendors.
Plan Benefit Duration – Short Term plan durations can range from 90 days up to 1 year; the most common we see is six months.
Interesting fact: What’s the most common Short Term Disability Claim?
Answer: Maternity. This is a very popular benefit for employees who have growing families. and helps keep some money coming in while “mom” is home with the new addition.
Long Term Disability Plan Moving Parts:
Elimination Period: Can range anywhere from 90 days to 1 or more years. This elimination typically will line up with the benefit duration from the employer-sponsored short-term disability plan so that they fit together perfectly, like a glove!
Monthly Maximum – Depending on the population and salaries of those being covered, this can range from $7500 a month to $12K or even $15K. Employer industry, salary levels, and insurance companies will be the drivers behind this amount.
Benefits Percentage – Will typically line up with the percentage in place for the short-term plan, ranging from 50% to 65% or even 70%, but like short-term disability coverage, the norm we see most often is 60%.
Plan Duration – On a Long-Term Disability Plan, this will be the one component that will drive costs up or down more than anything else. A long-term disability plan can be set up to pay claims anywhere from 2 years up to Social Security Retirement Age (SSNRA). The most common we see is SSNRA, but there are many plans out there with 2- and 5-year durations that are very competitive from a pricing standpoint. Don’t let a 2- or 5-year duration discourage you, those plans are still much better than what most people carry which is no protection at all.
The one other major piece of information you will want to be sure you understand when looking at a disability program is the definition of disability. You will see terms like “total disability” and “partial disability,” which will spell out how much of your income must be lost before you qualify to file a disability claim. These are usually carrier/plan specific. There will also be terms like “own occupation” and “any occupation” that refer to the timeframes someone can remain on a claim and the jobs they would be qualified to perform, depending on what they were doing before they went on a claim. Own occupation means you cannot perform your job before going out on a claim, where any occupation means you are unable to perform any job. As I am sure you can imagine, own occupation limitations tend to raise costs on disability plans where any occupation rules tend to lower the costs. Specialized industries such as doctors and lawyers tend to want to make sure they have longer own occupation rules in place than other industries that are not quite as specialized.
As you can see, disability plans can be a great addition to a benefits program but need to be considered carefully to make sure the benefits and mechanics of the plan meet the needs of the executive team and the employees. If you or anyone you know would like to explore offering a disability plan to your employee base or would like to have your current plan examined, please let us know. At Holloway Benefit Concepts, we are happy to give you our thoughts and some market data on possible solutions or improvements to your existing programs.