are the Holes in Disability Coverage?
By Jeanne Lazo and Carol J. Amato
Tom Larsen had a heart attack, he wasn’t worried about disability
coverage. He had always participated in his employer’s disability
insurance plan. After recovering, he returned to work. The next year,
he began working for a new company where he also participated in the
disability insurance plan.
later, a second, more severe heart attack forced him to go out on
long-term disability leave. Tom was stunned when the insurer denied
his claim, citing a pre-existing condition.
plans are like Swiss cheese—they appear substantial, but actually,
they’re full of holes. Even if Tom hadn’t changed jobs, his
previous employer’s insurer could have found other reasons to deny
or cancel his benefits.
needs to know how this happens because one in three people will
experience a disabling impairment for at least 90 days prior to age
65. Of those with disabilities that last at least 90 days, the average
disability will last for an additional 5.5 years (Life Association
News, March, 1994). The one in three could be you. A disability may be
temporary, caused by a sports mishap or home-repair injury, or
permanent due to a heart attack, like Tom’s, or arthritic disease,
stroke, cancer, Multiple Sclerosis, a car accident, an environmental
hazard, or carpal tunnel syndrome or other job-related injury.
covered under one or more of the five major, nationwide disability
plans? If you are, or don’t know, here’s what you need to know to
Security Disability Insurance (SSDI)
covers employees who have contributed sufficiently and long enough
to the Social Security Trust Fund, typically 10 years. This
requirement creates a hole for younger employees who haven’t worked
enough years and contributed sufficiently.
addition to this requirement, individuals must meet Social
Security’s narrow definition of disability: “An adult is disabled
if he or she is unable to engage in any substantial gainful activity
because of a medically determinable physical or mental impairment
which has lasted or can be expected to last for a continuous period of
at least 12 months, or can be expected to result in death.” Clearly,
Social Security doesn’t pay for partial or temporary disabilities.
If Tom qualifies, he must prove that he can never do any work that
exists in the U.S. economy.
some individuals, obtaining SSDI approval takes years, often requiring
attorney assistance. SSDI’s five-month waiting period for cash
benefits and two-year waiting period for Medicare benefits places an
additional financial burden on disabled employees.
Security Income (SSI),
a second plan Social Security provides, is available to all Americans
with disabilities but only after they have exhausted their income and
assets. Although SSI uses the same definition of disability as SSDI,
payment into the Social Security Trust Fund is not required. In most
states, SSI recipients automatically receive Medicaid insurance
Compensation (WC), a plan that pays both cash and limited medical benefits, covers
employees injured on the job. Although employers in most states must
provide Workers’ Comp insurance, not all employees are covered, such
as contract workers, sole proprietors, and partners. Also, not all
injuries are covered—for example, those sustained while commuting to
and from work.
are denying more claims because a single one can cause their premiums
to increase, and Workers’ Comp costs are already skyrocketing. This
means many employees must fight for their right to collect benefits,
often requiring attorney assistance. Most states require you to seek
treatment from Workers’ Comp-approved doctors and limit the type and
number of treatments.
Disability Insurance (ESDI) provides two types of coverage
for injuries incurred on- and off-the-job: 1) Short-term, for
disabilities lasting less than six months, and/or 2) Long-term, for
disabilities lasting more than six months. ESDI pays cash benefits and
does not provide medical insurance coverage.
vary widely. The biggest hole in ESDI is that most employees have
never seen a copy of the actual policy and don’t know what coverage
they have or don’t have. Typically, employees base their buying
decision on a short blurb provided during open enrollment.
are not required to offer ESDI and employees do not have to
participate. If you do have
this coverage, however, ask your HR Manager for a copy of your policy
and read it carefully.
the definition of disability. Are you covered if you can’t do your
present job (called “own occupation”) or any
type of job (called “any occupation”)? Will the definition change
at some point? Some policies shift from “own occupation” to “any
occupation” after two years.
the waiting period for benefits to start? What percentage of your
income will you receive each month, and how is your pre-disability
income calculated? Some policies exclude commissions and bonuses.
clauses thoroughly; for example, are pre-existing conditions excluded?
If so, how is a pre-existing condition defined?
drawback to ESDI is that disputes cannot be resolved in a state court
and judge by a jury. This right is pre-empted by ERISA, an antiquated
federal law that governs all employer-provided benefit plans. You must
first appeal an adverse decision within the insurance company’s
internal appeal(s) process. Only after this remedy has been exhausted
can you sue the insurer in a federal court.
inherent problems of ESDI are two-fold:
Resolving a dispute can take years and usually requires the help of an
attorney at your expense.
cannot collect punitive or actual damages; your only award, if you win
in federal court, will be the reinstatement of your original benefits
(typically, federal court judges do not award attorney fees).
result, the insurer has nothing to lose by wrongly denying your claim
or canceling your benefits.
gap is the “between jobs” hole. Unlike medical insurance, which
may continue through COBRA when you leave a company, ESDI stops when
you are terminated.
If you are
depending on this insurance protection, beware! You may find that your
policy won’t pay you as much or as long as you think.
Disability Insurance (PDI) provides the most dependable
protection. Like ESDI, it covers on- and off-the-job injuries and is a
cash-only benefit plan; it doesn’t provide medical insurance
ESDI, however, PDI disputes can be appealed in a state court and
judged by a jury. In the past, juries have been sympathetic to
disabled individuals who have been mistreated by big insurers, and
they have awarded punitive and actual damages as well as attorney
fees. Fear of jury reprisals is a powerful incentive for insurers to
treat their policy-holders fairly.
most employees don’t have PDI, perhaps because they believe other
plans will provide an adequate safety net. Now that you are armed with
the facts, you may want to shop around for this coverage because once
you are disabled or have been diagnosed or treated for certain
diseases, you cannot purchase it.
what to look for:
The best policy uses the “own occupation”
definition of disability and is “non-cancelable and guaranteed
renewable.” Don’t rely on the sales literature. Make sure
these words are written in the policy!
Look for a policy with minimum clauses that give
the insurer a way out of paying you benefits.
time to evaluate your situation. Raise awareness of the holes in
disability coverage within your company. If you are a business owner
or HR manager, talk to your insurer and employees. When your contract
comes up for renewal, try to negotiate a better policy.
ability to earn a living is your greatest asset. Don’t end up like
Tom. Your earning power is worth insuring, especially given the high
odds that disability will strike you without warning.
Read other articles and learn more about
Lazo and Carol J. Amato.
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