Are employers really doing their employees (or themselves, for that matter) a favor by providing them with employer-paid group long-term disability insurance (LTD) coverage? You betcha, maybe!
Most employees wouldn’t have income protection coverage at all if disability insurance were not a company-paid benefit, because most employees either can’t afford it, haven’t recognized it as a real need or don’t believe they will ever become disabled. But are the employees really being done a favor? If more employers really knew of the many deficiencies of these group plans, which can affect even employers themselves, they might think twice and look at some other options.
This article makes more mention of group plans as opposed to association plans, simply because most group plans have a more consistent set of deficiencies, and association plans suffer from a wider variety of deficiencies
Typically, underwriting a disability insurance application, either for group LTD or association coverage, is less involved compared with underwriting individual plans. Sometimes, coverage can be issued even on a guaranteed basis. Individual plans require much more underwriting (health, financials, duties, etc.), due to the guarantees and liberal wording in the contract, all of which allow a claim to be paid in more circumstances and conditions.
On the other hand, there are reasons why group and association plans are more forgiving and have less underwriting. If the carrier’s claims experience becomes too high (thus reducing the carrier’s profitability), one of two actions may result. Either the group or the association plan may get canceled unilaterally by the carrier, or the carrier may raise the rates (which are not guaranteed as individual plans are). Neither of these two scenarios is a pretty picture.
However, coverage might be issued on a guaranteed basis by group and association LTD plans. This can be a very desirable element, especially for an association member or a company employee who is applying for group coverage, and is uninsurable or has a pre-existing condition that would normally be excluded from coverage (as it would be under an individual plan).
A word to the wise in connection with pre-existing conditions: When applying for any type of coverage, because a claim begins with the application, the applicant must fully disclose all pertinent information on the application. Omissions, misstatements or fraudulent statements can cause a claim to be denied or a policy to be rescinded. I know this firsthand, because over the years, I have been called in as a claims expert witness/consultant in dozens of lawsuits in order to help claimants overturn inappropriately denied claims.
Definition of total disability: Generally speaking, all definitions, terms and conditions in an individual policy are more liberal and can include a true own-occupation definition of total disability (i.e., even if the claimant is working in another occupation, benefits will still be paid for the full benefit period) versus the restrictive and split definitions found in most group and association plans. For example, depending on the various occupation classifications of the group, the following definitions for total disability might be offered: own-occ for two years or five years (the initial period), and thereafter not working in any occupation or unable to work in any reasonable occupation (given the claimant’s education, training or experience).
What that means is that after the initial period of time has expired, in order to continue collecting benefits for the remainder of the benefit period (which might be to age 65), the claimant must be unable to “flip hamburgers,” for example, or must be not working at all! These split definitions give the carrier some form of control of the claim and helps to keep the premium low.
Mental and nervous conditions: These subjective conditions are covered for only two years by all group plans. Currently, some individual plans are treating these conditions like any other illness and will pay benefits for the full benefit period. However, there are more carriers who also limit this type of disability benefit to two years, and some offer an even shorter benefit period as an option, in order to lower the premium.
This is a serious deficiency in both group LTD and association plans. Normally there is no portability at all! If a member leaves the group, or is no longer in good standing with the association, coverage terminates. Individual plans have no such limitations.
Renewability: There are a couple of different contract types. Obviously, guaranteed renewable or conditionally renewable contracts found in individual plans are the best. Without exception, these types are not offered to group or association plans. This means that coverage can be canceled by the carrier. (Otherwise, plans would be underwritten aggressively and would be higher in cost.)
Premium: Only (non-cancellable) individual plans offer guaranteed rates. Once again, if group/association rates were guaranteed, the cost would be much higher than their initially published rates. I say “initially published rates,” because these rates may be increased by the carrier at any time. Group rates will certainly be increased as the average age of the group rises, and rates for association plans are usually age-banded.
Salary: Usually group LTD coverage is limited to a maximum of 60-70 percent of wages, sometimes including commissions, normally excluding bonuses, along with a typical maximum monthly benefit amount (cap) of $5,000 per month (or higher).
A word of caution here: Be aware that a $5,000 cap may cause a “reverse discrimination” situation for most highly compensated employees, such as those with annual incomes above $100,000. The reason I refer to this situation as reverse discrimination is that although executives earn $200,000 annually, for example, they still will get only $5,000 per month – not $10,000 based on 60 percent. As a result, they are then covered for only 30 percent of their wages! This is not too good, in view of the fact that it can be hard enough to live on 100 percent of income!
Bonus: This form of income, as previously mentioned, is usually not covered by LTD. As a result, the insureds (even those making less than $100,000 annually) will not receive their full 60 percent of coverage.
Offsets (Reductions to the Benefit Amount)
Standard offsets, or reductions to the benefit amount payable from group plans, are:
 Workers’ Compensation;
 Social Security disability;
 benefits received under a retirement plan that has been triggered prior to the retirement date; and
 other disability income policies.
However, there are some carriers who do not offset. Those who do not will charge a higher premium for this option.
It must be noted that employer-paid group coverage plans will be taxable. However, there are ways to circumvent this taxable event, i.e., to have the premium paid by the employer and still receive benefits tax-free!
What can be done to fix some of these group coverage deficiencies? The easiest and most “doable” fix is to correct the “reverse discrimination” problem. There are two ways to accomplish that. One way is to have certain classes of employees “opt out” and then have the employer provide a tax-free individual plan for the full amount for which the employee is eligible. The other way is to provide a tax-free individual plan to supplement the taxable group coverage, or raise the cap if that is economically feasible.