Income protection plans are part of an overall strategy of sound financial planning. Many of our client company’s offer Life and Disability 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 (such as $50,000) or a multiple of the employee’s annual salary. 

The workplace is a leading source for obtaining life insurance coverage. According to a recent Met Life study, 63% of employees with life insurance coverage obtain that coverage through their employment.

An advantage of offering life insurance through the 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 required. This is achieved by spreading the risk to the insurer throughout the employer group. In addition there are 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 in 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, you remain covered and your premiums are waived while you remain disabled until age 65.

• Policy Conversion
  Under this provision if your group life coverage is reduced or ends, you can convert to an individual life policy, with no medical evidence of good health requirement.  However, because the carrier must accept your risk, premiums for this converted individual policy typically are quite expensive.

Accidental Death and Dismemberment (AD&D) Insurance
According to the National Safety Council, accidents are the leading cause of death for Americans under the age of 40 and the 5^th leading cause for people of all ages. 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 limbs, eyesight, speech or hearing.

In the event of accidental death or serious injury the AD&D benefit more than likely will equal the underlying basic life benefit amount; or a percentage of 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 the employee meet important financial obligations until they are able to return to work.

The need for this coverage is significant:

• Disabilities affect one-fifth of Americans (nearly 50 million people).
• Over 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 during the year.
• At age 35 a person has a 50% 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.

The risk of disability is greater than the risk of premature death:

(Sources:  National Association of Insurance Commissioners, U.S. Census Bureau, National Safety Council and Society of Actuaries.)

In 2005 only 37% of those who applied for Social Security disability payments were awarded benefits.  For many who received benefit payments the award did not provide for sufficient income replacement protection.

Disability Insurance Plans – Things to Consider
When purchasing a disability insurance policy a careful review of the contract provisions is recommended:

• 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?

Disability Insurance – Types of Plans

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. In addition the policy will detail the length of time, or duration, that benefits are payable. For proper income protection, a Long Term Disability (LTD) plan will be 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.

The following states mandate employers to provide short term income replacement plans:

• California
• Hawaii
• New Jersey
• New York
• Rhode Island

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.

In addition to the above states, Puerto Rico also mandates coverage.

Long Term Disability (LTD) Insurance
After STD benefits are exhausted, a well designed disability protection program will integrate and 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 policy “duration” for which benefits are payable, typically until age 65 or Social Security normal retirement age.

For the first two years of disability, most LTD contracts include a definition of disability provision that continue benefit payments only if the insured is unable to perform his or her “own-occupation.” That is, the insured is unable to return to gainful employment –performing the material duties of an occupation of the same general character as that prior to the onset of disability.

After the two-year “own-occupation” period elapses, most contracts define disability based upon an “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 the material duties of any occupation.

Additional considerations for 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 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.

Additional Resources:
America’s Health Insurance Plans (AHIP) – Consumer Guides, “An Employer’s Guide to Disability Income Insurance”
Met Life – Press Release, Major Life Event Study
Met Life – Financial Impact of Premature Death
California Economic Development Department – Disability Insurance
Council for Disability Awareness – Chances of Disability

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