Group Chap 12: Group Disability Income Benefits Flashcards
Introduction
- Disability Insurance (DI) designed to replace lost income resulting from a serious accident or sickness
- Determining whether someone is disabled can be challenging
- Setting the proportion of lost income to <100% of the earnings prior to disability encourages disabled EEs to return to work and discourages filing unsubstantiated claims
- Good example of insurable risk - low likelihood but extended period of disability could be financially and psychologically devastating
Long Term Disability (LTD)
- Definition of Disability
- Elimination Period
- Benefit Period
- Benfit Amount
- Benefit Offsets
- Limitations and Exclusions
- Optional Beneifts
- Self-insured LTD Plans
- Voluntary LTD Plans
1. Definition of Disability
a. Disability depends not on medical symptoms, but on the insured’s inability to perform occupational duties
b. Own occupation definition
- Unable to perform some or all duties of employee’s own occupation
- Usually applicable for first 24 months of disability
- More generous
- Makes it easier to qualify for DI benefits
c. Any occupation definition
- Once an EE has been disabled for some period of time (usually 24 months), it is common to use the stricter “any gainful occupation” definition
- Unable to perform duties for any occupation
d. Partial, residual, or loss of earnings definition - allow someone working part-time to qualify for DI benefits, reduced by their work earnings while disabled
e. Some LTD contracts require that the insured receive Social Security DI benefits after 2-3 years of disability in order to continue receiving LTD benefits
2. Elimination Period (EP)
a. Period of time that covered EEs must be disabled before they are eligible to collect DI benefits
b. They avoid overlaps in coverage with sick leave or STD programs
- Usually EP is 3-6 months (i.e. the length of the STD coverage, in order to avoid overlap)
3. Benefit Period (BP)
a. Number of years - most common (e.g. 2 to 5 years) or “to age 65”
- “To age 65” is evolving into “social security normal retirement age”
b. Age discrimination in Employment Act (ADEA)
- ADEA states that cost of benefits must not decline with advancing age of the EEs
- Most companies provide benefits paid until age 65 for disability prior to 60, and then grading own between 60 and 70
- The shorter BP at older ages is offset by higher claim rates, so the total expected cost for a particular age is not lower than that for a younger age
4. Benefit Amounts
a. Typically a defined percentage of pre-disability earnings (such as 60%), not to exceed a maximum benefit amount
b. When EEs pay the premiums, results in a higher percentage of after-tax inome being replaced
(1) Employer-paid premiums result in taxable benefits
(2) EE-paid premiums result in tax-free DI benefits
5. Benefit Offsets
a. LTD benefit offset by income from other sources to ensure the sum of benefits plus income from other sources does not exceed pre-disability earnings
- Maintain incentive for employee to go back to work
b. Integration with Social Security treated in a variety of ways
- 1. Only the primary social security benefit may be deducted
- 2. Any family social security benefits may be deducted
- 3. All sources integration - the primary and family social security benefits deducted only if DI benefit and the social security exceed some income percentage (e.g. 70%)
c. Advantages of disabled individual receiving social security benefits
- Reduces cost of the insurance program for the ER
- EE receives higher replacement of income since social security benefits aren’t fully taxed
- Allows continued social security credits for the disabled individual
- Qualifies the disabled person for Medicare benefits
d. Methods to reduce LTD benefits by a disabled EEs earnings from working while disabled
- 1. Proportionate loss formula - percentage of lost work earnings is applied to the benefit otherwise payable
- 2. 50% offset method - benefit reduced by $1 for every $2 or work earnings
- 3. Work incentive benefit - ignores earnings during initial period unless work earnings plus benefits would exceed 100% of pre-disability earnings. At that point, benefit is reduced dollar for dollar by the excess amount. After work incentive period, either proportion or 50% offset is used
- Example: Pre-disability earnings of $10k per month, LTD provides benefit of $6k per month, individual works part-time earning $2,500 per month
(1) Proportionate Loss: (10-2.5)/10 = 75%. 75% * 6 = $4,500
(2) 50% offset: 6k - 50% * 2.5k = $4,750
(3) Work incentive: Since 2.5k + 6k < 10k, the net LTD benefit is the full $6k.
6. Limitations and Exclusions
a. Used to manage the risk of antiselection and avoid costly administration of subjective claims
b. Special conditions limitation clause - example is limiting benefits by mental and nervous and/or drug and alcohol conditions to 2 years
c. Preexisting condition exclusions for disabilities occurring during the first 12 months of policy, which manifested 3-12 months prior to issuance of the policy
d. Other - act of war, intentionally self-inflicted injury, and commission of a felony
e. Certain states - laws that restrict or prohibit certain benefit limitations/exclusions on LTD policies
- e.g. Vermont - prohibits limitations related to mental illness or substance abuse
- New York - pre-existing conidition limitation limited to a max period of 12 months
7. Optional Benefits
a. COLA - inflation protection for benefits received during disability
b. Survivor benefit - lump sum benefit payable to the insured’s survivors
c. Child Care reimbursement (for day care expenses)
d. Retirement benefit - benefit payable in lieu of contributions to retirement plans that would otherwise be lost due to lost earnings
e. Portability - ability for insured to leave the group and continue group coverage by paying premiums directly to insurer
f. Conversion option - ability to convert to either group or individual DI coverage
g. Spousal benefits
h. Catastophic benefits - additional amount for a more serious type of disability
8. Self-insured LTD plans
a. Many large employers choose to self-insure all or part of LTD
b. Many choose to insure claims after an extremely long period (during which benefits are self-insured)
c. May purchase stop-loss coverage for claims tthat exceed a specified cost
d. Tax legislation made self-insurance less attractive
9. Voluntary LTD plans
a. Trends that contributed to a rise in voluntary coverage, in which some of the premium is paid by EEs:
- Rising medical costs
- Expansion into new markets
- Greater recognition of the need for DI coverage
b. If EE-paid, after tax-money used for premiums, then benefit is non-taxable
Short Term Disability (STD)
- Primary Differences between STD and LTD
- Definition of disability
- Elimination Period
- Benefit Period / Amount
- Optional Benefits
- Mandated State Disability Income (SDI)
1. Primary differences between STD and LTD
a. STD benefits are paid weekly vs LTD paid monthly
b. Benefit period for STD is shorter (usually 13 or 26 weeks)
c. Much of claim cost for STD comes from normal maternity claims and accidents, while much of LTD comes from illness
2. Definition of disability
a. Unable to perform own occupation
b. May be focused only on accidents or sickeness occurring outside of the workplace (i.e. non-occupational coverage)
- Avoids overlap with workers’ compensation coverage
c. Partial disability benefits can be found on STD to better coordinate the STD and LTD programs
3. Elimination Period (EP)
a. Very short - 7 or 14 days is common
b. Common to have shorter EP for accidents than for sickness
c. STD has higher frequency of claim than LTD and much shorter claim durations
- Experience becomes credible more quickly, and greater proportion of STD self-insured than with LTD programs
d. Common to design sum of STD Elimination Period and maximum benefit period = LTD Elimination Period
4. Benefits
a. STD maximum benefit amounts typically smaller than LTD
- EEs have other sources of funds to meet their needs for the short term
- ER sick leave program supplements the STD plan
b. STD usually not integrated with Social Security benefits of part-time earnings
- Occassionally integrated with ER sick leave
c. Few exclusions for STD
- Pre-existing condiion exclusions less common than for LTD
5. Optional Benefits
a. 1. 24-hour coverage - payable for on-job as well as off-job injury and sickness
b. 2. First day hospital coverage - EP is waived, and benefits begin immediately if the insured is confined in hospital due to the disabling condition
c. 3. Survivor benefit - similar to LTD (lump sum paid to suvivors upon insured’s death)
d. Less common include portability and work incentive benefits
6. Mandated State Disability Insurance (SDI)
a. California, New Jersey, New Yor, Rhode Island, Hawaii, and Puerto Rico have STD programs for workers in their state
b. Insurers either offer longer EP for LTD or reduce STD benefit so that the sum of STD + SDI match the benefit desired by the ER
c. For all states except Rhode Island, the ER can elect to cover the mandated benefits under a private program
d. Paid Family and Medical Leave (PFML) legislation
- Mandates PFML benefits for all eligible employees in the state
- States have adopted programs - Washington Massachusetts, Oregon, Connecticut, and Dc
- Benefits similar to STD benefits; paid to employees who take time off work to treat serious health conditions or maternity leaves of absence, time to bond with newborn children or to care for relatives with serious issues
7. Family and Medical Leave Act (FMLA)
a. Permits eligible EEs to take extended leaves of unpaid absence for personal or family medical reasons, with continued group coverage from employer
b. May be absent up to 12 weeks over a 12 month period
c. If caring for family member injured in military, time period is up to 26 weeks
d. Difficult and expensive for employers to administer
e. Due to complexity, STD insurers may offer full leave administration services to customers (provides STD insurance along with adminsitrative support)
Trends
1. 1980s - disability carriers had solid growth and high profits
- New entrants to markets
- Less strict definitions of disability
- Small rate increases
2. Early 1990s - increased stress on professional occupations
- This was the primary market for disability insurers at the time
- Claims costs increased and profits decreased
- Insurers responded with rate increases, product changes, underwriting guideline changes, and more sophisticated claim adjudication systems
3. 1996/1997 - rates rebounded from low point in 1995
- After-tax profits have generally remained from 6-9% since then
- 2017 Tax Cuts and Jobs Act - Increased profits by reducing corporate tax rate from 35% to 21%
4. 2019 Statistics
- Group disability market totals around $18.3 billion in premium - $12.5 billion in LTD and $5.8 in STD
- STD premiums up 7-8% per year in past three years, LTD premiums up 4-5% per year
5. Packaging STD and LTD
- Insurers believed packaging STD and LTD together would lower LTD claims costs
a. Companies could manage big claims at an earlier date, so discounts were offered
b. Has not materialized as expected to justify discounts being offered - Maybe due to STD benefits that allow employee to remain out of work during LTD elimination period, thus leading to more LTD claims
c. Some insurers now increase premium rates when STD and LTD are packaged (to cover higher incidence of LTD claims)
6. Emergence of PFML Programs in Different States
- Most significant recent challenge to disability insurers
- Some employers may not see the need to provide STD insurance in addition to state mandated PFML insurance
- Many insurers specualte the impact of the PFML plans will be large and are exploring the risks and opportunities in the changing marketplace
