Income Protection plans are part of an overall strategy of sound financial planning. Companies offer life and disability insurance plans to provide for the financial protection of their employees and families in the event of unexpected and catastrophic loss.
Basic Life Insurance
Employer-sponsored “term” life insurance pays benefits in the event of death of an insured. This type of group insurance is considered "term" because benefits are payable during a pre-defined term of employment. Generally benefits are either a flat dollar amount or a multiple of the employee's annual salary.
An advantage of offering life insurance through your employer plan is that most policies are guaranteed issue. That is, life benefit amounts are offered with guaranteed acceptance–no medical evidence of good health is required. This is achieved by spreading the risk to the insurer throughout the employer group. This provides tax advantages to both the employer and employee.
The following policy enhancements often are included in a group life plan:
- Terminal-Illness Benefit (also known as Living or Accelerated Benefit)
If the insured has a limited life expectancy (12 months or less), payment of a substantial percentage of the coverage amount (typically 50% or more) is made while the insured is still living, with no restrictions on how the benefit is spent.
- Waiver of Premium
If an insured is permanently disabled before age 60 and remains disabled for at least nine months, premiums are waived and coverage continues during disability until the insured reaches the age of 65.
- Policy Conversion
Under this provision, if group life coverage is reduced or ends, coverage is converted to an individual life policy, requiring no medical evidence of good health. Because the carrier must accept this risk, premiums for this converted policy are typically more expensive.
Accidental Death and Dismemberment (AD&D) Insurance
AD&D plans are usually coupled with a basic life insurance policy and provide additional benefits in the event of accidental death or debilitating injury resulting in the loss of limb, eyesight, speech or hearing. In the event of accidental death or serious injury, the AD&D benefit will more than likely equal the underlying basic life benefit amount, or provide a percentage of that benefit, based on the severity of injury. The cost for providing this benefit is relatively inexpensive.
Disability Insurance Plans
Disability Insurance provides income protection in the event of a serious illness or injury. The coverage provided helps employees meet important financial obligations until they are able to return to work.
Types of Disability Insurance plans include:
- Short Term Disability (STD) Insurance
This income replacement plan pays a percentage of salary for employees that are unable to work due to an illness or injury. STD policies have waiting periods (called "elimination" periods) generally lasting 7 days before benefits are payable. The policy will detail the length of time that benefits are payable. For proper income protection, a long-term disability (LTD) plan is structured to begin providing benefits once the STD's duration is met.
Standard STD policies are written to cover losses resulting from a non-occupational illness or injury. However, policies can also be written to cover all losses–including occupational; these are termed "24-hour" policies. Compliance regulations vary by state; however, employers can either participate in the state plan or provide employees with an insured or self-funded private STD plan. STD plans "offset" benefits realized from those paid under these state plans.
- Long Term Disability (LTD) Insurance
After STD benefits are exhausted, a well-designed disability protection program will continue benefits with a LTD plan. As with STD, LTD plans pay a percentage of pre-disability earnings and have waiting (or elimination) periods before benefits are payable, generally 90 days. LTD plans also have a duration for which benefits are payable, typically until age 65 or normal Social Security retirement age.
For the first two years of disability, most LTD contracts include a “Definition of Disability” provision that will continue benefit payments only if the insured is unable to perform his or her “own occupation”–that is, if the insured is unable to return to gainful employment by performing the duties of an occupation of the same general character as that prior to the onset of disability.
After the two-year period elapses, most contracts define disability based upon the "any-occupation" test. This "any-occupation" period spans the remainder of the disability period. To remain eligible for disability benefits, the insured must be unable to perform duties of any occupation.
Facts–Americans and Disabilities
- Disabilities affect one-fifth of all Americans (nearly 50 million people).
- More than 21 million Americans have a condition limiting basic physical activities, such as walking, climbing stairs, reaching, lifting or carrying.
- On average, about 2,329 disabling injuries occur every hour.
- At age 35, a person has a 50 percent chance of being unable to work for more than three months due to a disability before age 65.
- Unexpected illnesses and injuries cause 350,000 personal bankruptcies each year.
Disability Insurance Plans: Things to Consider
- How does the policy define disability?
- When does coverage begin—what is the waiting or "elimination" period?
- What is the length of time that benefits are paid—what is the duration period?
- How much income is covered as a benefit?
- Are benefits taxable or tax-free?
Short Term Disability
The following states mandate employers to provide short-term income replacement plans:
- New Jersey
- New York
- Rhode Island
In addition to the above states, Puerto Rico also mandates coverage.
Facts About Long Term Disability (LTD) Plans
- Most LTD plans offer return-to-work incentives and rehabilitation programs.
- Contracts can allow for a cost-of-living increase provision.
- Taxation of benefits is based upon whether employees contribute, and to what extent, to the premium cost of the plan.
- A pre-existing condition clause excludes from payment any disabilities resulting from conditions that were treated or would have been treated by a "reasonably prudent" person prior to coverage.
- Most carriers limit benefits for substance abuse and mental or nervous conditions to two years. Similar limitations can also be placed on so called "self-reported" conditions.