Disability Coverage

Disability Insurance

Disability Coverage

Here are the benefits you can expect to kick in when you become disabled:

• Sick leave. At minimum, you’re likely to have some sick leave at full pay, typically five to ten days, longer if you’ve accumulated it over several years. Your employer may also provide short-term disability insurance, which picks up after sick leave and usually runs 26 weeks. (In California, Hawaii, New Jersey, New York and Rhode Island, state law entitles you to disability coverage for up to 26 weeks.) During that time you could get your full salary (after taxes) for six weeks, followed by 50% to 60% of your income.
• Worker’s comp. If your disability is the result of a job-related accident, you’ll also have access to worker’s compensation, an employer-paid program mandated by most states. Worker’s comp pays cash as well as medical benefits; like short-term disability, it’s designed to provide help early on, usually within a week of an injury. But don’t count on worker’s comp to cover expenses if you’re used to a big salary. States usually cap the benefit at two-thirds of the average statewide wage.
• Social security disability insurance. You’ll be eligible for social security disability insurance if you’ve worked long enough under the social security system and your disability prevents you from doing any substantial work for at least a year. Those are tough standards, which only a third of first-time applicants meet (about half of rejected applications are overturned on appeal). You’ll get the first check six months after you become disabled.
• Long-term group disability. You may assume — or hope — your boss has you covered for long-term disability. Better consult your benefits book. Only about 40% of workers in medium-size and large companies receive the coverage, and even fewer employees of small companies are protected. Further, you may not qualify for coverage unless you’ve worked at the job for a specified period, perhaps several years.

A standard group plan replaces 60% of income up to $5,000 a month; but some plans replace as much as 80% or as little as 50% of income, or cap the benefit at $3,000 monthly. A few policies provide annual increases of 2% to 8% or are tied to the consumer price index. Whatever the benefits, you’ll probably have to undergo at least a 90- or 180-day waiting period before they kick in, ideally just as short-term coverage ends. And add a few weeks: Checks are retroactive to the previous earning period.

In examining benefits, you should ask what the definition of income is. The replacement calculation may not include overtime, bonuses, commissions or pretax contributions to a 401(k) plan, for instance, or your earnings may exceed the cap, skewing the percentage recovered. Even if you make a six-figure salary, the most you would receive with a $5,000 monthly max would be $60,000 annually.

And that’s before income taxes, owed on any disability coverage purchased by your employer. The tax whammy hits so hard at all pay levels that “it’s very difficult for people today to cover just the basic mortgage,” says Linda Culliton of Mercer Inc., a benefits consulting firm.

Further, you can’t pile up income from various sources to boost the total amount: Generally, programs coordinate so that worker’s comp pays first, offset by social security and then by group disability.

Learn About Disability Insurance

The following are terms that can be found in most long term disability (LTD) and short term disability (STD) policies. While many of these terms apply only to group insurance, some are also applicable to individual disability insurance policies.

• Active, Full-time Employee. An individual must work for the employer on a regular basis in the usual course of the employer’s business to be considered an active, full-time employee and eligible for coverage. Usually, a minimum number of hours of regular work is specified.

• Benefit Percentage. The benefit payable is usually determined as a percentage of the insured’s pre-disability income up to an overall maximum benefit amount.
• Conversion Privilege. If included, this option allows employees who are terminating employment to continue some or all of their LTD coverage at their own expense without submitting evidence of insurability.
• Definition of Total Disability. Probably the most important provision in a disability contract is the definition of disability that will be used to determine an employee’s eligibility for benefits.
  • Own Occupation (Own Occ): Under this definition, an insured will be considered disabled only if he/she is unable to perform the duties of his/her occupation.

  • Any Occupation (Any Occ): Under this definition, an insured will be considered disabled only if he/she is unable to work in any occupation for which he/she is qualified by education, training, or experience. This is somewhat similar to the definition that the Social Security Administration uses in determining disability.
• Definition of Partial/Residual Disability. This further definition of disability applies when an insured is able to return to work part-time or even full-time (with a loss of earnings). If the employee is working in this limited capacity and is earning less than a certain level of income, he/she will still be eligible for limited benefits under the plan. Not all disability insurance carriers use this terminology to describe a “part-time” work situation, but most provide some type of benefit to encourage return to work.
• Elimination Period. This is the period of time between the date the disability commences and the beginning of the benefit payment period. It is the period during which an employee must be disabled before payment of benefits begins. It is sometimes referred to as the Qualifying Period.
• Evidence of Insurability. Group disability coverage is generally sold as “guaranteed issue” which means that evidence of insurability is not required. However, under certain circumstances (e.g., late enrollment or a high benefit maximum), an employee must provide medical or financial information as proof to the insurance company that he/she is insurable.
• Exclusions. There are specific provisions included in group disability plans which exclude coverage in certain situations. Typically, a plan will not pay benefits for disabilities arising from war, participation in a riot, commission of a felony, or self-inflicted injury.
• Family Care Expenses. A disabled employee who has family care responsibilities may need extra help when trying to return to work. This type of benefit provides an incentive to the employee who is taking part in a rehabilitation program by allowing credit or partial reimbursement for certain expenses incurred for family care. This is generally an optional benefit under most long term disability policies.
• Indexing. Indexing is designed to provide some protection against inflation. After the first year of disability, a disabled employee’s pre-disability earnings are usually increased (or indexed) by a certain percentage on an annual basis for purposes of determining any disability benefit payable.
• Limitations. There may be specific provisions included in group disability plans that limit coverage in certain situations. Often only limited benefits are payable for specific conditions or under specific circumstances (e.g., mental illness and pre-existing conditions). See also Mental Illness Limitations and Pre-Existing Limitations below.
• “Mandatory” Rehabilitation. Based on the premise that most people want to work in order to lead active, productive lives, a “mandatory” rehabilitation provision encourages disabled employees to participate in rehabilitation efforts whenever appropriate. Such a provision allows for termination of benefits if the employee refuses to cooperate or participate with a rehabilitation plan.
• Maximum Benefit Period (Benefit Duration). This is the maximum length of time for which benefits are payable under the plan as long as the employee remains continuously disabled.
• Maximum Monthly Benefit. This is the highest dollar amount a disabled employee can receive on a monthly basis under the LTD plan.
• Mental Illness and Substance Abuse Limitations. When a disability is caused by a psychological/behavioral/emotional disorder, or by alcoholism or the non-medical use of narcotics, sedatives, and so on, benefits provided under group disability policies are usually limited to a period of 12 or 24 months unless the employee is confined to a hospital. Individual disability policies generally do not contain this limitation.
• Minimum Monthly Benefit. There is usually a minimum amount paid as a monthly benefit after reductions for Other Income Benefits.
• Other Income Benefits (Benefit Integration). While disabled, an insured may be eligible for benefits from other sources. Benefits payable under the group LTD plan may be offset (reduced) by other sources of disability income such as Social Security, workers compensation, or disability benefits received from other employer-sponsored plans.
• Pre-Disability Earnings. This is the amount of an employee’s wages or salary that was in effect and covered by the plan on the day before the disability began.
• Pre-Existing Condition Limitations. When an insured has a physical or mental condition that existed prior to the effective date of his or her insurance coverage, it is considered a pre-existing condition. Most plans exclude or reduce disability benefits for any illness or injury for which an employee received medical treatment or consultation within a specified time period before becoming covered under the plan.
• Recurrent Disability. The recurrent disability provision is designed to protect an employee who tries to return to work but becomes disabled again from the same or a related cause. If this happens within a certain period of time, the employee will be considered disabled from the original disability, and will not be subject to a new elimination period. This encourages an employee to return to work without fear of losing benefits if he or she continues to be disabled.
• Rehabilitation. Rehabilitation means the restoration of or improvement in an employee’s health and functionality. It usually involves a program of clinical and vocational services with the goal of returning a disabled employee to an active, productive life, and a meaningful occupation if possible.
• Return to Work Provision. To encourage employees to return to work as soon as they become physically able, an additional incentive is usually provided for a certain period of time, and is called a return to work provision. Under this provision, the employee can receive up to 100 percent of pre-disability earnings based on a combination of disability benefits and return-to-work earnings.
• Survivor Benefit. The survivor benefit is a lump sum payment that will provide benefits to the insured’s eligible survivors in the event the insured dies while receiving disability payments. This is an optional benefit in most policies.
• Waiting Period. In order to become eligible for coverage under the policy, an individual must satisfy a certain number of continuous days of service as an active, full-time employee. This is known as the waiting period. (In addition, a waiting period can also be the time period between when a disability occurs and when payments from the disability insurance policy begin — what we have discussed as an “elimination period.”)
• Waiver of Premium. When an individual becomes disabled and eligible for benefits, no further disability premium payments are required as long as benefits are being paid out.
• Workplace Modification or Accommodation. This benefit is designed to provide assistance to an employer when a disabled employee requires modification of the workplace or special adaptive equipment in order to return to work. The employer will usually be reimbursed up to a set amount for the cost of such modifications.