Long-term disability insurance plans are the least common group employee benefit. That's too bad because the ability to earn a living is the largest asset any of us owns.
The Most Important Benefit
If you haven't already read about how little your employees know about disability and how unlikely they are to have coverage, click here to review employee attitudes and knowledge about LTD.
So we'll assume you know how important the benefit is, and now we'll move on to a review of the basic provisions of disability income plans. Read the sidebar to the right to see just how frequently your employees need disability income plans.
How Likely Is A Disability?
More likely than you may think:
One in three employees will be disabled for 90 days sometime between his 35th and 65th birthdays.
And one in seven will have a disability that lasts longer than five years!
Major Considerations in Disability Income Plans' Design
So let's hit the highlights of long-term disability plans and how they can be structured in the small to medium-sized company.
There are three basic benefit design considerations:
- Waiting period before benefits start.
- Percent of pre-disability income paid
- Maximum Benefit amount
- Length of benefit period
In addition to that, there are other, more sophisticated considerations, but we'll get to those later. If you're already familiar with basic LTD provisions, you can click here to jump to the advanced section.
When Do Benefits Start?
Disability payments begin after a waiting period, called an elimination period. The most common elimination period is 90 days, although 180 and 360 days are also found.
Part of your decision about the start date depends on the length of any short-term disability plan -- if any -- that your company offers. You don't want to pay an employee twice... and neither does the carrier.
If you have an STD plan, you'll want the LTD benefit to start just as the STD plan stops. A 13-week STD plan suggests a 90 day elimination period LTD plan (13 weeks = 91 days).
Likewise, a 26-week STD plan would result in a 180 elimination period LTD plan.
How Much Is the Plan Paying?
The amount of benefit you receive is some fraction of your compensation, typically 60%, but it can be anything. The lowest typical percentage is 50%, and the highest is 66-2/3 percent.
The more you allow to be paid out, the more expensive the plan will be. (Duhh!)
What's the Maximum Benefit?
You can limit the maximum benefit to a dollar amount, in addition to limiting the percent of income that's paid out.
The typical benefit percentage is 60%, so that means that the employee who earns $5,000 a month will receive a $3,000 benefit.
Perhaps the salary schedule of your company is such that only a handful of people make more than $60,000. In that case you might want to limit the maximum benefit to $3,000 to protect them. There are other ways to take care of the higher-paid employees.
How Long Will the Plan Pay?
After benefits begin, they will be paid for some defined period of time. Ten years ago it was common to find plans with benefit periods of two or five years; today almost all plans pay until about age 65.
I say "about" age 65 because there are several ways for the benefit period to be described. The most common is "reducing benefit duration" (RBD in the parlance of the trade).
With reducing benefit duration, if you're initially disabled before age 60, your benefit will last until age 65 (unless, of course, you get better). If you're initially disabled after age 65, your benefits will extend beyond age 65.
The benefit time period varies with your initial age at disability. For example, if you're disabled at age 62, your benefits will go for three years, six months. At age 64 they'll go for two years, six months. At 65 they'll go for two years. This continues until about age 69 (assuming you're still working) when you get one full year of benefits.
Another benefit period is "Social Security normal retirement age," or SSNRA. In the eighties when we first found out that Social Security was going bankrupt, Congress extended the normal retirement age for folks born after 1939.
If you were born before 1939, you'll collect starting at age 65. If you're born after 1955 your Social Security benefits start date will be age 67. If you're born in between you'll start at an in-between age.
So many long-term disability plans pay benefits until Social Security benefits actually begin. That way there's no gap in your coverage.
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