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.