How to Plan for Life’s What-Ifs – with Long-Term Disability Insurance

September 16, 2018

Few people can imagine a day when they will be too ill or injured to work. Unfortunately, it’s not that uncommon. According to the Council for Disability Awareness, more than one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach the normal retirement age.

Two sources of supplemental income, Workers’ Compensation and Social Security Disability Insurance (SSDI), have limited applications. Workers’ comp only covers time away from work if the illness or injury is work-related. In 2016, only one percent of workers missed work because of an illness or injury at work. From 2006 to 2015, only 34 percent of workers who claimed SSDI had their applications approved. Long-term disability insurance has a wider application.

Long-term disability insurance dropped in popularity for a few years as employers focused on complying with the Affordable Care Act’s health insurance provisions. However, interest in the benefit is gaining again as more employers and employees see the advantage of protecting employees’ salaries when they’re unable to work.

Short-term disability insurance pays benefits for the first three to six months, and then long-term disability kicks in. A typical long-term policy pays about 50 to 60 percent of an employee’s salary, with a $5,000 monthly maximum payout, until the employee can return to work. Some policies will pay until age 65.

The most common reasons for long-term disability claims include musculoskeletal disorders, cancer, pregnancy, mental health issues and injuries. Keep in mind that many insurers are requiring employees to answer health-related questions and show evidence of insurability. Some insurers have a pre-existing condition provision and won’t pay benefits for as long as a year.

According to the Council of Disability Awareness, the average duration of a claim is nearly three years. Few families have enough savings to last them 34.6 months. In 2015 the Federal Reserve Board surveyed adults and found that about 53 percent said they don’t have enough money saved to cover three months.

Employers can pay for sponsored long-term disability insurance premiums in several ways:

  • Employer Fully Paid: Employers often automatically enroll employees and pay for all the premiums — an easy way to meet the required minimum level of employee participation required by some insurers. When employers leave it to employees, they often only get 30 percent participation. However, even when an employer automatically enrolls all company employees, only 75 percent usually keep the benefit. If an employee goes on disability, they must pay taxes on any benefits they receive.

  • Employer/Employee Shared Costs: Some employers pay for a basic benefit that replaces 40 percent or 50 percent of income and then offer employees the opportunity to make additional payments for benefits that would increase the replacement amount to 60 to 70 percent of their salary.

  • Employee Fully Paid: This can be offered as a voluntary benefit with the employee paying all the costs. If they do this, they can handle the payments in different ways: • Employees pay their premiums with pre-tax dollars. If they become disabled and make a claim, they must pay federal taxes on the benefit.

  • Employees pay their premiums with after-tax dollars. They pay more now, but if they become disabled and make a claim, they will get more money because they won’t have to pay federal taxes.

The challenge for many employers is educating employees so they understand the benefits of a long-term disability policy. Education is key, particularly for younger employees who may think they are invincible. They should understand the benefits of having both short- and long-term disability benefits and understand how tax choice options can affect their disability benefits.

Interested? Talk to us about the best options for your employees.