May 14, 2008

Group Disability Income Coverage

The purpose of disability income coverage is to partially (and sometimes totally) replace the income of employees who are unable to work because of sickness or accident. While employers expect employees to miss a few days of work from time to time, there is often a tendency to underestimate both the frequency and severity of disabilities that last for longer periods. At all working ages, the probability of being disabled for at least 90 consecutive days is much greater than the chance of dying. One out of every three employees will have a disability that lasts at least 90 days during his or her working years, and one out of every ten employees can expect to be permanently disabled prior to age 65.

In terms of its financial impact on the family, long-term disability is more severe than death. In both cases, income ceases. In the case of long-term disability, however, family expenses—instead of decreasing because of one less family member—may actually increase because of the cost of providing care for the disabled person.

Employers are less likely to provide employees with disability income benefits than with either life insurance or medical expense benefits. It is difficult to estimate the exact extent of disability coverage because often benefits are not insured and workers are sometimes covered under overlapping plans. However, a reasonable estimate would be that at least 75 percent of all employees have some form of short-term employer-provided protection, but only about 40 percent have protection for long-term disabilities. This does not mean that almost all employees have some sort of disability income coverage, because many employees have both short-term and long-term protection and thus are included in both estimates. These estimates are also somewhat misleading because most employees have long-term disability income coverage under Social Security as well as coverage for certain types of disabilities under other government programs.

Group disability income protection consists of two distinct products:

Short-term disability income plans, which provide benefits for a limited period of time, usually six months or less. Benefits may be provided under uninsured plans or under insured plans, often referred to as accident and sickness insurance or weekly indemnity benefits.

Long-term disability income plans
, which provide extended benefits (possibly for life) after an employee has been disabled for a period of time, frequently six months.

Two important tasks in designing and underwriting insured group disability income plans are to coordinate these products with each other (if both a short-term and a long-term plan are provided for employees) and to coordinate them with other benefits to which employees might be entitled under social insurance programs or uninsured sick-leave plans. A lack of coordination can lead to such a generous level of benefits for employees that absences from work because of disability might be either falsified or unnecessarily prolonged.


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