Lesson 4

Question 1

1.1 Identify 4 key characteristics of LTD plans

Answer 1

1) Benefits are only pay able after an elimination period (usually covered under sick benefits, WI/STD, CPP/QPP, WC, or EI)
2) The definition of disability relates to the plan member’s ability to perform his or her own occupation or any occupation
3) The monthly benefit is usually a percentage of the plan member’s pre-disability earnings
4) The benefit period usually ends at the earliest of the plan member’s recovery or the age 65

Question 2

1.2 Explain how the length of the elimination period for LTD impacts premiums charged by insurers

Answer 2

The longer the elimination period the lower the premium.

This is because a longer elimination period increases the chance the member will return to work before becoming eligible for LTD benefits.

Question 3

1.3 Define “any occ” in the context of LTD plans

Answer 3

Where the member’s disability renders them unable to perform any occupation for which the member is or may reasonably become, suited to perform based on education, training, or experience

Question 4

1.3.b Define “own occ” in the context of LTD plans

Answer 4

The member is considered by the plan to be totally and permanently disabled if they cannot perform the regular duties of their own occupation

Question 5

2.1 Explain the significance of the LTD benefit formula and detail what typical income replacement is

Answer 5

A LTD benefit typically replaces 50-75% of a plan member’s gross income and is subject to a maximum dollar amount.

The LTD formula selected is significant because it affects the amount of benefit received by a plan member and the cost to the plan sponsor.

Question 6

2.2 List the factors that are considered when a plan sponsor sets its LTD benefit formula (7)

Answer 6

1) Tax implications
2) Benefit maximums
3) Direct and indirect offsets
4) Definition of earnings
5) Recurrent disability
6) COLA
7) Partial disability and residual disability provisions

Question 7

2.3 Describe the tax implications when a plan member pays some or all LTD premiums

Answer 7

Benefits received aren’t taxable if the employee pays the premiums or if the employer pays the premium on behalf of the disabled employee during an elimination period for benefits but the amount paid as premium is reported as taxable income.

If a plan member only pays a portion of the premiums the taxable portion is equal to the benefit received less the sum of contributions paid by plan member since Dec 31, 1967 and for which deductions haven’t previously been made.

LTD benefits paid from a self funded plan are subject to plan sponsor and plan member CPP/QPP and EI contributions.

Question 8

2.4 Outline how pre-disability earnings are defined in LTD plans - what is included?

Answer 8

Gross earnings immediately prior to the date of disability.

Can include bonuses, commissions, and overtime when earned on a regular basis.

Commissions are usually based on the average for the past 24 months.

Question 9

2.4 Outline the level of benefits usually provided in LTD plans

Answer 9

Where benefits are non-taxable 55%-67% of gross earnings.

A lower benefit is applied if the gross benefit is above a certain amount.

Where benefits are taxable the amount of benefit is between 55% and 75%

Question 10

2.6 Identify 5 factors a plan sponsor considers when deciding whether to implement a taxable or nontaxable LTD plan

Answer 10

1) In a nontaxable plan member premium contributions are made with after tax dollars.

In a Taxable plan the member pays taxes only when benefits are received. This makes taxable plans preferable to members that don’t receive benefits from them.

2) In a nontaxable plan with a fixed percentage of salary benefit schedule the net replacement ratio increases as salary levels increase. This reduces the incentive for to return to work. A tiered benefit schedule reduces this problem.
3) In a nontaxable plan members may want a role in designing the plan because they are paying for it
4) In a nontaxable plan plan members may feel more entitled to receive benefits as they are paying for benefits. However claims adjudication by the insurer can limit this impact.
5) In a taxable plan LTD benefits qualify as earned income for RRSP contribution purposes

Question 11

2.7 Describe the nonevidence maximum (NEM) as it applies to LTD plans

Answer 11

The NEM is the amount an insurer will cover without evidence of insurability.

If a member is entitled to coverage in excess of the NEM then evidence will be required and subject to underwriter’s review.

Question 12

2.7.b Explain the Overall Maximum as it relates to LTD

Answer 12

The OM is the maximum amount an insurer will provide and is outlined in the benefit schedule

Question 13

2.8 Explain the basis for calculating benefit maximums in LTD plans

Answer 13

Usually takes into account the number of individuals to be insured and the average amount of insurance per person.

Each insurer uses its own formula to determine LTD maximums, though results tend to fall within a fairly narrow range.

Question 14

2.9 Outline the benefits that are usually included as direct offsets in LTD plans (2)

Answer 14

1) benefits payable from government sponsored benefit programs including
a) CPP/QPP disability and
b) WC benefits

2) benefits payable from auto insurance (where permitted by law).

When a plan member receives benefits from these sources the plan becomes the second payer and the amount payable from the plan is reduced

Question 15

2.10.a Describe what indirect offsets are in the context of LTD plans

Answer 15

Indirect offsets limit income from all named sources to a specified multiple of pre-disability earnings, known as an all source maximum.

These offsets result in a reduction in LTD benefit only if the total income from the plan plus other sources exceeds the all source maximum.

All named sources typically includes direct offsets, indirect offsets and the LTD plan itself

Question 16

2.10.b List 4 indirect offsets in the context of LTD plans

Answer 16

1) Benefits payable in an association or other group disability program
2) Any income as a result of any job or business for remuneration or profit, excluding severance or vacation pay
3) CPP/QPP disability pension payable to the plan member’s dependents as a result of the member’s disability (some insurers no longer consider this an indirect offset)
4) Any retirement benefits related to any employment (group but not individual RRSPs, Public Service Superannuation, Ontario Municipal Employee Retirement Pension etc.)

Question 17

2.11 Explain the purpose of all source maximums in LTD plans

Answer 17

To prevent a disabled member’s total income from becoming so close to their pre-disability earnings that they have no incentive to return to work.

If the LTD benefit is taxable the all source maximum is based on a percentage of gross earnings up to 80% or 85%. If non-taxable the percentage is of net income.

Question 18

3.1 Identify circumstances under which insurers will waive recommencement of the elimination period for LTD under the recurrent disability provision (2)

Answer 18

1) An individual returns to work on a full time basis during the elimination period and becomes totally disabled within 14-30 days due to the same or related disability. The individual is determined to have been continuously disabled and doesn’t have to wait to receive benefits.
2) An individual returns to work on a full time basis following a period of disability and becomes totally disabled within six months due to the same or a related cause. This individual is considered to have been continuously disabled for the purposes of the elimination period.

Question 19

3.2 Explain the COLA provision in LTD plans

Answer 19

If a disability lasts for more than two years inflation can diminish the value of LTD benefits.

COLA typically provides an indexing of the disability payment based on CPI and not exceeding a stated maximum (usually 3%-5%)

The adjustment is made on an annual basis, typically Jan 1 based on the last 12 monts.

Question 20

3.3 What is a partial disability provision in the context of LTD plans

Answer 20

Partial disability covers members who are able to work in a limited capacity while receiving LTD.

The provision typically specifies that total income from all sources cannot exceed 100% of pre-disability income.

Eligibility is linked to the definition of total disability in the LTD contract and as such varies widely between insurers.

Question 21

3.3.b What is a residual disability provision in the context of LTD

Answer 21

Allows a plan member to work in a limited capacity during an elimination period and still have those days count as part of the elimination period.

This lowers plan expenses and can hasten a return to work by members as they have a higher sense of self worth.

In practice residual disability provisions are uncommon and adjudication practices vary widely among insurers.

When offered some insurers look at whether a plan member’s earnings fall below a certain threshold (20% or more loss of monthly earnings due to sickness or injury) while other insurers don’t specify an earnings test.

Question 22

4.1 Explain the purpose of a preexisting condition provision in an LTD plan

Answer 22

A preexisting condition provision protects against the negative impact of high claims that could result where an individual joins the plan with a preexisting condition.

The provision excludes coverage for any medical condition that existed and for which a plan member received treatment during a specific period

Question 23

4.1.b What is the most common preexisting condition provision for LTD plans

Answer 23

The most common limitation is 3/12, where benefits aren’t payable for a total disability that commences during the first 12 months of coverage if the disability results from any sickness or injury for which the plan member was treated or attended by a physician or for which prescribed drugs were taken within 90 days prior to the effective date of the individual’s insurance.

Question 24

4.2 Identify 9 standard limitations and exclusions in LTD plans (9 + 1)

Answer 24

1) any period where a plan member is not under the appropriate care of a physician
2) If the plan member engages in any occupation for remuneration or profit except as approved by the insurer under the partial disability benefit or approved rehabilitation program
3) Any period during which the claimant is receiving EI maternity or parental benefits
4) If the plan member refuses or fails to participate in an approved modified work or rehabilitation program as required by the insurer
5) If the plan member is outside of Canada either permanently or temporarily and such an absence is not approve by the insurer
6) Any period during which the member is confined to a penal institution or correctional facility
7) An intentionally self inflicted injury or attempted suicide while sane or insane
8) War, whether declared or undeclared
9) Participation of or commission of or attempt to commit a criminal offence

Benefits are usually also not payable during strike, leaves of absence or temporary layoff if the disability is commenced after those begin. However the elimination period can be satisfied during those periods.

Question 25

4.3 Outline circumstances in which LTD benefits terminate (4)

Answer 25

At the earliest date the plan member

1) recovers,
2) dies,
3) attains maximum age or
4) does not adhere to specific insurer requirements

Question 26

4.3.b Outline six specific insurer requirements that failing to adhere to can result in LTD benefits being terminated

Answer 26

1) Fails to submit required proof of ongoing disability
2) Refuses or fails to comply with the third party subrogation provision
3) Fails to report for a medical examination required by the insurer
4) Stops receiving appropriate treatment for the condition being treated and where requires treatment by a relevant and certified specialist
5) Participates in any occupation for remuneration or profit other than an approved modified work or rehabilitation program
6) Is confined in prison or other similar institution

Question 27

4.4 Identify criteria disabled plan members must meet to continue receiving insured LTD benefits if the plan sponsor cancels the group insurance contract or changes the plan design after benefit payments have started (3)

Answer 27

1) The coverage must have been in force and the plan member must have been eligible at the time the disability started
2) The plan member must continue to meet the definition of disability in the contract
3) The plan member must have been actively working prior to the time the disability started, as defined by the group contract.

Question 28

4.5 Describe the purpose of a waive-of-premium provision in LTS plans

Answer 28

The waiver of premium provision allows the insurer to waive the premium payable for LTD benefits while the member is receiving LTD benefits.

This is similar to the waiver of premium for life insurance.

In some cases the definition of disability that triggers the waiver of premium under group life insurance is different than that applicable to LTD coverage.

Life insurance is often based on any occ and LTD can be either any occ or own occ

Question 29

4.6 Describe and provide an example of third party subrogation of claims

Answer 29

A subrogation clause entitles the insurer to be reimbursed by a plan member for any amount they may receive as lost earnings by a third party that is liable for their injury.

For example an insurance settlement.

Question 30

5.1 Describe approaches used for funding LTD

Answer 30

In practice the most common approach is insured nonrefund (nonrefund accounting). This can be pooled or non pooled and it may be either duration or large amount pooling.

With duration pooling the insurer sets aside a portion of the LTD premium against expected claim payments beyond a specific period of time. In return both the claim payments and disabled life reserves are fully insured in respect of claims past the duration limit (usually 2-5 year periods)

Large amount (high individual limit) pooling protects the plan sponsor with respect to claims from any one individual past the pooling limit or pool ceiling for which the plan sponsor pays a pool charge.

Self insurance is generally not feasible where there are fewer than 1,000 participants.

Question 31

5.2 List 5 advantages to plan sponsors of funding LTD plans through an insured arrangement over a self insured arrangement

Answer 31

1) It may reduce the plan sponsor’s exposure to changes in claims levels from year to year.
2) It puts some distance between the plan sponsor and the member in terms of disputed claims.
3) It relieves the plan sponsor of plan administration duties.
4) It may reassure plan members that benefits are actually available and the plan will continue to cover claims.
5) It is not subject to the payment of payroll taxes that are applicable to self insured plans with ASO arrangements

Question 32

6.1 Under what standards does the definition of postemployment benefits include LTD plans

Answer 32

The Employee Future Benefits section of the Canadian institute of chartered accountants handbook

The International Accounting standards 19 employee benefits for publicly traded companies

Question 33

6.1.b If LTD benefits are not service related (as is the norm) what is the liability that must be recognized if significant risks have not been transferred.

Also what is the expense

Answer 33

A liability equal to the PV of expected future payments if there are plan members receiving benefits.

The PV is on the measurement date and the expense is the benefits payable during the accounting period plus the change in disabled life reserve

Question 34

6.1.b If LTD benefits are not service related (as is the norm) what is the liability that must be recognized if significant risks have been transferred.

Answer 34

The liability is limited to the net premiums payable to the insurer during the accounting period assuming it is a yearly renewable contract.

Question 35

6.1.b If LTD benefits are service related (as is the norm) what is the liability that must be recognized

Answer 35

The accounting standards require an accrual of liability of the plan member’s service with the plan sponsor as with defined benefit pension plans.

The attribution period starts on the DOH and ends at the expected date the member becomes eligible to receive a benefit.

If the significant risks have been transferred to an insurer the liability is limited to any outstanding premiums at that time.

Note that a yearly renewable term contract does not transfer the significant risks of a services related plan since the insurance premiums only provide sufficient funds to pay the claims incurred during the current year.