The Inside Scoop on Disability Insurance 

By Jeanne Lazo and Carol J Amato

Most employers try to hire the best employees possible.  They make a significant investment in training with the hope that these people will make a positive contribution to the company for many years to come.  Sometimes, however, this plan is derailed by disability.  According to the Society of Actuaries (1995), one out of seven employees will suffer a five-year or longer period of disability before age 65.  The probability that a 35-year-old employee will experience a three-month or longer disability is 50%. 

How can you minimize the draining effect of disability on your business and its employees?  One way is to offer disability insurance, sometimes called group insurance.  Another is to advise employees about what they need to do to protect themselves. 

Why Offer Disability Insurance?: By law, U.S. companies aren’t required to offer disability insurance benefits.  Why, then, should your company offer this coverage?

Competition: If your competitors (or those competing for your employees) offer disability benefits, then you should, too, because you want to attract and retain the best employees.

High stakes: Most Americans’ greatest asset is the ability to earn a living, yet most have savings to cover only six month’s of living expenses.  Employees’ income/earning ability needs to be insured far more than their homes, cars, or other tangible goods.

Disability is unpredictable: Common causes of disability include cancer, back problems, diabetes, heart disease, and accidents.  From this list, it’s clear that employers cannot eliminate the risk of many types of disabilities from affecting its workforce. 

Negotiate More Bang for the Buck: How can you be sure the coverage you choose will provide the protection you and your employees need?  Let’s look at the essentials. 

Adequate income protection: Policies use a variety of definitions of disability.  Some policies state “an employee is considered disabled if he/she is unable to do any occupation.”  These types of policies are a waste of money because a policy that pays only if an individual can’t do any occupation is no insurance at all.  An engineer, for example, will not be paid any benefits if, after a disability, he/she can stuff envelopes or other type of minimum-wage job.  This is not income protection. 

Negotiate for a policy with an “own occupation” clause that pays benefits if the employee cannot do the job he/she was educated and trained to do.  It should contain a residual benefit clause that makes up for any loss of income if the employee can do some type of work but suffers a loss of income.  A residual benefit clause, if truly honored by the insurer, offers a win-win benefit for all three parties: the disabled employee returns to the workforce in perhaps a lesser-earning capacity, with lost income partially replaced by the policy; the insurer’s payouts are reduced; and the employer retains a good employee.

Job retraining assistance and workplace modification payments: Negotiate for a policy that motivates and helps the employee rebuild his or her life after a disability.  It is in everyone’s best interest for disabled employees to become as financially self-sufficient as possible and for the company not to lose its investment in these employees.

Tax protection: If premiums are paid by the employee, benefits will not be taxable to him or her; if paid by the employer, the employee will pay taxes on benefits.  Taxes can reduce monthly disability checks by 30-40%.  Consult a tax attorney to set up the best plan.  

Adequate duration of coverage: Employers may opt to offer short-term and long-term disability coverage.  For someone who is severely disabled, a long-term policy that pays only for a limited time, such as two years, offers little protection.  Negotiate long-term policies that pay benefits up to age 65 or retirement age under Social Security.

No “differential review standard:” Negotiate to keep “differential review standard” out of the policy your company purchases so that your employees retain the right to a complete review of their cases by the federal courts, if necessary.  If you aren’t an attorney who specializes in employer-sponsored disability insurance cases, these words may not be meaningful to you, but to the courts and the claimant in ERISA-governed disability insurance disputes, these words make a world of difference in the type of consideration the case will receive. 

ERISA preempts (prohibits) the employee from the following justice system rights: state court appeals, jury trials, awards of punitive damages, actual damages, and in most cases, attorney fees in disability insurance disputes.  Therefore, insurers have nothing to lose if they renege on their policies. 

With a policy that specifies a differential review standard, in disputes that escalate to the federal courts, the judge will not look at the facts of the case but merely determine if the insurer had some basis for denying or canceling benefits to the claimant.  Any trumped-up reason will suffice.  This is a grave miscarriage of justice. 

Teach Your Employees to Protect Themselves: Education is the key to minimizing the impact of disability on your company and its employees.  Here’s a checklist of ideas: 

Distribute a copy of the actual disability policy to employees.  Surprisingly, many company executives and human resource managers have never seen a copy of the actual policy themselves!  Employees need to know the definition of disability, how pre-disability is calculated per the policy (commissions and bonuses may not be included), what percentage of pre-disability earnings will be paid, how long benefits will be paid, and what types of disabilities are excluded or other limitations in the policy. 

Educate your employees about the statistics on disability.  If your company offers different levels of coverage, such as 40% and 60% of earnings coverage, emphasize the advantages to your employees of having the extra coverage for what is typically a minimal extra cost. 

Educate your employees about each type of disability coverage and the inherent gaps in each.  

• Worker’s Compensation covers only on-the-job injuries and illnesses, but it doesn’t cover all employees or injuries (that is, it doesn’t cover contract workers or injuries incurred while commuting).

• Social Security Disability Insurance (SSDI) benefits require claimants to 1) have contributed sufficiently to the Social Security trust fund (typically, 10 years), and 2) prove that they are unable to do any work that exists in the U.S. economy.  More than half of the individuals who apply for Social Security disability are denied coverage and, if approved, the payment amounts of $500 to $2,000 per month may be inadequate.  Social Security does not provide the disability safety net most employees expect.

• Employer-sponsored disability insurance plans provide 24/7 protection, but unlike COBRA medical benefits, coverage terminates when an employee leaves the company.  Also, due to policy limitations and ERISA legal recourse restrictions, this insurance may not pay as much or as long as employees expect.

• A private disability insurance policy provides the most dependable, long-term protection possible because it offers complete legal recourse if the insurer reneges on its policy terms.  A private policy must be purchased, however, while the employee is still healthy.

The Bottom Line: Disability insurance is far more valuable than most employers or employees realize and educating employees is essential.  While you want to provide income protection for employees who suffer a severe disability, it is just as important to provide employees with lesser disabilities with information on all of their options before they choose to go out on disability leave.  Since disability can strike without warning, it’s essential for you, your company, and its employees to be prepared ahead of time!

Jeanne Lazo, MBA, and Carol J. Amato, MA, are the authors of Persistence is Power! A Real-World Guide for the Newly Disabled Employee.