Group Short and Long Term Disability

Insurance

Course Objectives

• To provide an understanding of group disability insurance and the disability market with particular emphasis on . . .– Sick-Leave– Short-Term Disability Plans – Long-Term Disability Plans– Voluntary/Worksite Plan

24%

12%

8%

7%

6%

5%

5%

4%

3%

26%

0% 5% 10% 15% 20% 25%

Mental Illness

Alcohol/Drug

Alzheimer's

Muscuoskeletal

Respiratory

Cardiovascular

Sense Organ

Injuries

Disgestive

All other

Top seven chronic conditions causing work limitations

Society of HR Mgt, WorkplaceVisions; World Jea;tj Prgamozatopm 2001Society of HR Mgt, WorkplaceVisions; World Jea;tj Prgamozatopm 2001

Distribution of Coverage

JHA Disability Fact Book 2003/2004 Edition

STD LTD

63.7% 64%

15%

21.3%

16.4%

19.5%

Employer pays allEmployer pays all

ER and EEER and EE

Employee pays allEmployee pays all

The Current Market Position

• In a survey of business with 1-99 employees, 52% of the firms offered LTD and 48% offered STD

• Larger groups (500+) are more likely to offer disability benefits vs smaller employers (<100 ees)– LTD: 90% vs 77%– STD: 84% vs 62%

• Manufacturing firms are more likely to offer STD (70% vs 55%) then LTD (61% vs 71%) then non-manufacturing firms

JHA Disability Fact Book, 2003/2004 EditionJHA Disability Fact Book, 2003/2004 Edition

Self-Funded or Sick-Pay Plans

• Typically self-funded by the employer

• Often tied to tenure

• Usually capped at a certain number of work-days, ie., 10 days

• Almost always ‘total only’

• Needs to meet employers needs and coordinate with other plans

Common Plan Design Parameters

• Benefit: 60% or 662/3 % to $500

• 0/7/13 or 0/7/26

• Non-occupation

• Family integration

Short-Term Disability (STD) Plans

Common Plan Design Parameters

• Benefit: 60% to $6,000• 90 or 180 day elimination period• 2 year own occupation• Zero day residual with partial• Family integration• 2 year mental and nervous

Long-Term Disability (LTD) Plans

• Own occupation typically 2,3,5 years or own occ to age 65– Unable to perform all the material duties of own

occupation on a full-time basis for selected # of years

• Any occupation begins after own occupation period ends– Unable to perform the duties of own or any other

occupation for which person is fitted by training, education, experience, age and physical and mental capacity

Own/Any Occupation

• Basic Monthly Earnings– With or without commissions and/or bonuses– 12 or 24 month average

• W-2 Earnings

• S-Corporation Earnings

• Partnership Earnings

• Teacher’s Earnings

Insurable Income Options

• Workers’ Compensation

• Social Security

• Other Compulsory Group Disability

• Government Retirement Disability

• Employer’s Retirement Disability

• Unemployment

Other Income Benefits

Social Security

• Primary only

• Primary and family

Common Income Offsets

Primary Only

LTD Benefit $4,600

Primary and Family

LTD Benefit $4,250

• 401k plans and 403B plans• VA benefits• Profit sharing not funded by employer• Thrift plans• IRAs• Tax sheltered annuities• SOPs – stock ownership plans• Retirement benefits• No-fault auto insurance

Income Not Typically Offset

Worksite

• Payroll – Simplified Issue– Individual– Optional Riders

• Group– Guarantee Issue– Participation requirements

Payroll

• Typically include individual, payroll deducted products

• Usually ‘simplified’ issue with limited medical underwriting

• Portable• Often with limited plan design, ie., benefit

duration• Often sold on an ‘indemnity basis’ versus as a

percentage of one’s income ($500 per month)

Group Voluntary

• Typically a group chassis, with age-brackets• Premium is calculated by taking the rate (either

age-bracket or composite) times the employee’s covered monthly income

• 60 % of covered earnings• Typically Guarantee Issue during the ‘open

enrollment’ and requiring Evidence if a late enrollee

• Usually require some minimum participation level• Limited portability

Core-Buy Up

• Increasingly popular option• Employer purchases a base plan and allows the

employee to ‘buy-up’ on a voluntary, payroll deduction mode

• ‘Buy-ups’ can include benefit duration, benefit amount, elimination period

• Can help stabilize the employees cost and allows the employee to purchase on a group basis with price breaks and guarantee issue

Core-Buy Up Sales Example

Benefit Plan Design Core Plan CorePLUSMonthly Earnings $5,000 $5,000After-tax income $3,500 $3,500Benefit Plan 50% to $5k 60% to $6kGross benefit $2,500 $3,000Taxable benefit $2,500 $1,500 ($3kx.65)Benefit not taxed $0 $1,050Taxes (fed+state) 30% 30%Total Tax $720(2,500 x .30) $585(1,950 x .30)

Net (after-tax) benefit $1,750(2,500-750) $2,415(3,000-585)

Core-Buy Up Options

Benefit Duration – The employer purchases a plan with benefits payable for 2 years or 5 years and the employee purchases protection to age 65Benefit Amount – The employer provides a limited benefit amount, ie., $1500/month and the employee purchases a higher maximum, ie., $5000/month using after-tax dollars thus creating a federal income-tax free benefit for the higher amountElimination Period – Purchasing a lesser elimination period versus the employer provided plan, ie, buy down the e.p. from 180 days to 90 days

• Group disability insurance is more necessary now then ever

• Most employees are living close to financial hardship and do not have the personal savings to withstand a work absence

• More options for providing disability plans to your employers and their employees exist then just a few years ago

• Your employer groups are looking for advice and counsel on plan design

Final Thoughts

Questions?