INSURED DISABILITY INCOME PLANS : Exclusions

Exclusions
Under certain circumstances, disability income benefits are not paid even if an employee satisfies the definition of disability. Common exclusions under both short-term and long-term disability income contracts specify that no benefits will be paid under the following circumstances:

- For any period during which the employee is not under the care of a physician.

- For any disability caused by an intentionally self-inflicted injury.

- Unless the period of disability commenced while the employee was covered under the contract. (For example, an employee who previously elected not to participate under a contributory plan cannot obtain coverage for an existing disability by deciding to pay the required premium.)

- If the employee is engaged in any occupation for remuneration. This exclusion applies in those situations when an employee is totally disabled with respect to his or her regular job but is engaged in other employment that can be performed despite the employee's condition.

Until the Pregnancy Discrimination Act, it was common for disabilities resulting from pregnancy to be excluded. Such an exclusion is now illegal under federal law if an employer has 15 or more employees. Employers with fewer than 15 employees may still exclude pregnancy disabilities unless they are subject to state laws to the contrary.

Additional exclusions are often found in long-term contracts. These commonly deny benefits for disabilities resulting from the following:

- War, whether declared or undeclared.

- Participation in an assault or felony. Note that some insurers have recently expanded this exclusion to include the commission of any crime.

- Mental disease, alcoholism, or drug addiction. However, some contracts provide benefits if an employee is confined in a hospital or institution specializing in the care and treatment of such disorders; other contracts provide benefits but limit their duration (such as for 24 months per disability).

- Preexisting conditions.

The exclusion for preexisting conditions is designed to counter the adverse selection and potentially large claims that could occur if an employer established a group disability income plan or if an employee elected to participate in the plan because of some known condition that is likely to result in disability. While variations exist, a common provision for preexisting conditions excludes coverage for any disability that commences during the first 12 months an employee is covered under the contract if the employee received treatment or medical advice for the disabling condition both (1) prior to the date the employee became eligible for coverage and (2) within 90 consecutive days prior to the commencement of the disability.

When coverage is transferred from one insurance company to another, it is not unusual, particularly in the case of large employers, for the new insurance company to waive the limitation for preexisting conditions for those employees who were insured under the previous contract. This is often referred to as prior coverage credit or a no-loss, no-gain provision. In some instances, the provision is modified so that benefits are limited to those that would have been provided under the previous contract, possibly for a specified duration, such as one year. Note that a transfer of coverage has no effect on the responsibility of the prior insurance company to continue paying benefits for claims that have already occurred, except in rare cases where some arrangement is made for the new contract to provide benefits.

INSURED DISABILITY INCOME PLANS : definition

INSURED DISABILITY INCOME PLANS
As mentioned, insured disability income plans consist of two distinct products: short-term coverage and long-term coverage. In many respects, the contractual provisions of both short-term and long-term disability income contracts are the same or very similar. In other respects—notably, the eligibility requirements, the definition of disability, and the amount and duration of benefits—there are significant differences.

Eligibility
The eligibility requirements in group disability income insurance contracts are similar to those found in group term insurance contracts. In addition to being in a covered classification, an employee must usually work full-time and be actively at work before coverage commences. Any requirements concerning probationary periods, insurability and premium contributions must also be satisfied.

Short-term and long-term disability income insurance plans frequently differ in both the classes of employees who are eligible for coverage and the length of the probationary period. Employers are more likely to provide short-term benefits to a wider range of employees, and it is not unusual for short-term plans to cover all full-time employees. However, these plans may be a result of collective bargaining and apply only to union employees. In this situation, other employees frequently have short-term disability benefits under uninsured sick-leave plans.

Long-term disability plans often limit benefits to salaried employees. Claims experience has traditionally been less favorable for hourly paid employees for a number of reasons. Claims of hourly paid employees tend to be more frequent, particularly in recessionary times when the possibility of temporary layoffs or terminations increases. Such claims also tend to be of longer duration, possibly because of the likelihood that these employees hold repetitive and nonchallenging jobs. Some long-term plans also exclude employees below a certain salary level because this category of employees, like hourly paid employees, is considered to have a reasonable level of benefits under Social Security.

Long-term disability income plans tend to have longer probationary periods than do short-term disability income plans. While the majority of short-term disability plans (as well as group term insurance plans and medical expense plans) either have no probationary period or have a probationary period of three months or less, it is common for long-term disability plans to have probationary periods ranging from three months to one year. While short-term plans only require that an employee be actively at work on the date he or she is otherwise eligible for coverage, long-term plans sometimes require that the employee be on the job for an extended period (such as 30 days) without illness or injury before coverage becomes effective.

Definition of Disability
Benefits are paid under disability income insurance contracts only if the employee meets the definition of disability as specified in the contract. Virtually all short-term disability income insurance contracts define disability as the total and continuous inability of the employee to perform each and every duty of his or her regular occupation. A small minority of contracts use a more restrictive definition, requiring that an employee be unable to engage in any occupation for compensation. Partial disabilities are usually not covered, but a few newer plans do provide benefits. In addition, the majority of short-term contracts limit coverage to nonoccupational disabilities, because employees have workers' compensation benefits for occupational disabilities. This limitation tends to be most common when benefits under the short-term contract are comparable to or lesser in amount than those under the workers' compensation law. In those cases where workers' compensation benefits are relatively low and the employer desires to provide additional benefits, coverage may be written for both occupational and nonoccupational disabilities.

A few long-term disability income contracts use the same liberal definition of disability that is commonly used in short-term contracts. However, the term material duties often replaces the term each and every duty. Some other contracts define disability as the total and continuous inability of the employee to engage in any and every gainful occupation for which he or she is qualified or shall reasonably become qualified by reason of training, education, or experience. However, most of long-term disability contracts use a dual definition that combines these two. Under a dual definition, benefits are paid for some period of time (usually 24 or 36 months) as long as an employee is unable to perform his or her regular occupation. After that time, benefits are paid only if the employee is unable to engage in any occupation for which he or she is qualified by reason of training, education, or experience. The purpose of this combined definition is to require and encourage a disabled employee who becomes able after a period of time to adjust his or her lifestyle and earn a livelihood in another occupation.

A more recent definition of disability found in some long-term contracts contains an occupation test and an earnings test. Under the occupation test, a person is totally disabled if he or she meets the definition of disability as described in the previous paragraph. However, if the occupation test is not satisfied, a person is still considered disabled as long as an earnings test is satisfied. This means that the person's income has dropped by a stated percentage, such as 50 percent, because of injury or sickness. This newer definition makes a group insurance contract similar to an individual disability income policy that provides residual benefits.

The definition of disability in long-term contracts may differ from that found in short-term contracts in several other respects. Long-term contracts are somewhat more likely to provide benefits for partial disabilities. However, the amount and duration of such benefits may be limited when compared with those for total disabilities, and the receipt of benefits is usually contingent upon a prior period of disability. In addition, most long-term contracts provide coverage for both occupational and nonoccupational disabilities. Finally, short-term contracts usually have the same definition of disability for all classes of employees. Some long-term contracts use different definitions for different classes of employees—one for most employees and a more liberal definition for executives or salaried employees.

WORKERS' COMPENSATION LAWS : Benefits, Disability Income, Death Benefits

Benefits
Workers' compensation laws typically provide four types of benefits:

- Medical care

- Disability income

- Death benefits

- Rehabilitative services

Medical Care
Benefits for medical expenses are usually provided without any limitations on time or amount. In addition, they are not subject to a waiting period.

Disability Income
For an employee to collect disability income benefits under workers' compensation laws, his or her injuries must result in one of the following four categories of disability:

Temporary total. The employee cannot perform any of the duties of his or her regular job. However, full recovery is expected. Most workers' compensation claims involve this type of disability.

Permanent total. The employee will never be able to perform any of the duties of his or her regular job or any other job. Several states also list in their laws certain disabilities (such as loss of both eyes or both arms) that result in an employee's automatically being considered permanently and totally disabled even though future employment might be possible.

Temporary partial. The employee can perform only some of the duties of his or her regular job but is neither totally nor permanently disabled. For example, an employee with a sprained back might be able to work part-time.

Permanent partial. The employee has a permanent injury, such as the loss of an eye, but may be able to perform his or her regular job or may be retrained for another job.

Most workers' compensation laws have a waiting period for disability income benefits that varies from two to seven days. However, benefits are frequently paid retroactively to the date of the injury if an employee is disabled for a specified period of time or is confined to a hospital.

Disability income benefits under workers' compensation laws are a function of an employee's average weekly wage over some time period, commonly the 13 weeks immediately preceding the disability. For total disabilities, benefits are a percentage (usually 66⅔ percent) of the employee's average weekly wage, subject to maximum and minimum amounts that vary substantially by state. Benefits for temporary total disabilities continue until an employee returns to work; benefits for permanent total disabilities usually continue for life but have a limited duration (such as ten years) in a few states.

Benefits for partial disabilities are calculated as a percentage of the difference between the employee's wages before and after the disability. In most states, the duration of these benefits is subject to a statutory maximum. Several states also provide lump-sum payments to employees whose permanent partial disabilities involve the loss (or loss of use) of an eye, an arm, or other body member. These benefits, which are determined by a schedule in the law, may be in lieu of or in addition to periodic disability income benefits.

Death Benefits
Most workers' compensation laws provide two types of death benefits:

- Burial allowances

- Cash income payments to survivors

Burial allowances are a flat amount in each state and vary from $300 to $5,000 with benefits of $1,000 and $1,500 being common.

Cash income payments to survivors, like disability income benefits, are a function of the worker's average wage prior to the injury resulting in death. Benefits are usually paid only to a surviving spouse and children under age 18. In some states, benefits are paid until the spouse dies or remarries and all children have reached age 18. In other states, benefits are paid for a maximum time, such as ten years, or until a maximum dollar amount has been paid, such as $50,000.

Rehabilitation Benefits
All states have provisions in their workers' compensation laws for rehabilitative services for disabled workers. Benefits are included for medical rehabilitation as well as for vocational rehabilitation, including training, counseling, and job placement.

A difficulty faced in providing vocational rehabilitation is that employers are reluctant to hire workers with permanent physical impairments because a subsequent work-related injury may result in their total disability and thus an increased workers' compensation premium. For example, a worker who lost an arm in a previous work-related accident would probably be totally and permanently disabled if the other arm was lost in a later accident. Consequently, most states have established second-injury funds. If a worker is disabled by a second injury, the employer is responsible only for providing benefits equal to those that would have been provided to a worker who had not suffered the first injury. Any remaining benefits are provided by the second-injury fund.