Properly structured benefits programs play a critical role in every employer’s ability to recruit and retain qualified employees. While medical insurance is obviously at the top of every employee’s list of key benefits, the second most important benefit valued by employees, particularly professionals, is long-term disability (LTD) insurance.
Disability insurance protects against financial disaster by replacing a portion of the disabled employee’s income if he/she becomes hurt or seriously ill and is no longer able to work. Determining the most appropriate LTD product requires careful attention to key clauses and wording. Here are the top coverage features to review:
Qualifying for Benefits: In the section that explains how a disabled employee qualifies for benefits, one small word can make a world of difference. Some plans require employees to be unable to perform the material duties of their job or have a loss in income due to injury or illness, while other plans require you to satisfy both criteria (job duties and loss of income).
Definition of Income: “Income” is defined differently in each LTD policy. Some policies do not insure bonuses or K-1 earnings. Be sure the policy includes all earnings derived from being an employee and/or owner of a business including bonuses, production formulas, and K-1 earnings.
Maximum Monthly Benefit / Covered Earnings: The maximum benefit payable on an LTD plan is typically 60% of income (covered earnings) up to $10,000 or less per month. Some policies offer up to 66 2/3% of monthly income up to $15,000 per month. Make sure the maximum benefit in the policy you select covers the appropriate level of earnings for key employees.
Duration of Benefits: Most LTD plans today pay benefits until age 65, or until the employees’ Social Security Normal Retirement Age (SSNRA), which may be 67 for younger employees. Be certain your LTD plan includes a “Normal Social Security Retirement Age Duration” clause; otherwise, younger employees will have a gap in coverage.
Definition of Disability: Most LTD plans require a loss of one or more of the “material duties” of your “own occupation” and/or a loss of at least 20% of income. If the policy changes the requirements from “own occupation” to “any occupation” after two, three or five years of disability, that may mean employee specialists such as lawyers or physicians can be forced to accept employment in lesser positions to maintain benefits. Law firms and medical practices should request policies that include “specialty / sub-specialty” language which eliminates the “any occupation” issue.
Partial Disability – Most LTD plans provide benefits for partial disability, but some use partial disability formulas that can penalize highly-compensated owners and employees. Request the exact formulas to determine the impact partial disability would have on highly compensated employees.
Benefit Termination – Some LTD policies terminate benefits if a disabled employee fails to return to part-time work when able, refuses to cooperate with retraining efforts or moves outside the United States. Watch for LTD policies using language designed to “manage” disability claims.
Benefit packages are an important employee recruiting and retention tool. Make certain you have properly structured insurance products in your benefits offering and clearly communicate the value of these products to your current and potential employees. Group long term disability (LTD) products are complex contracts; ask a trusted advisor to help you make the right choice!
This notice is provided as information only and should not be considered a legal opinion. If you have questions about this Client Advisory, please contact Seacrest Partners at 912-544-1900.