Maximizing the potential of disability insurance

More employers are making disability income benefits available to employees, at the same time that the proportion of those employees who have access to disability income DI coverage choosing to take advantage of it is edging downward.

This trend could spell trouble for employers facing the prospect of making tough decisions regarding employees who sustain injuries or illnesses resulting in either their partial or total inability to work for an extended or indefinite period of time.

Reported uptake rates of long-term disability dropped to 63% last year from 67% in 2013, even as the percentage of employers offering it rose to 53% from 49%, according to research from EBRI and Greenwald & Associates.

Reported take-up rates include both employer- and employee-paid coverage, which explains why take-up rates are high compared to other categories of insurance, such as critical illness, typically offered only on a voluntary basis.

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Many employers believe assuring that their employees have financial protection in the event of a disability is vital enough to the organization’s strength to pick up the premiums. “It’s money that’s going to come off the bottom line one way or another,” says Joe Patrico, CEO of Heggeness, Sweet, Simington & Patrico, a San Diego-based law firm.

“We didn’t want anyone to become destitute” for lack of financial protection in the event of an inability to work, he adds. That means he might have felt the need maintain a financial lifeline for disabled key employees.

The company has 55 employees, seven of whom are also shareholders (and as such treated differently under California law). Over the years several of the firm’s employees have had to take advantage of the LTD when conditions including heart disease, acute diabetes and cancer rendered them unable to work.

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In California, employers are required to pay for a state-administered short-term disability plan, but it only provides benefits for 90 days. However, it’s the LTD protection that many employers in California and beyond cannot afford to pay for – even though the cost is often lower than they might expect.

Rich Fahn, a benefits broker and president of Excell Benefit Group, LLC, in Northbrook, IL frequently encounters employer misconceptions about LTD. One is the cost. “A business owner might have an individual policy, and think employees would have to pay the same kind of rate” if they purchased it through a voluntary benefit plan. That is not the case, however.

While benefits professionals are aware of that fact, they often find themselves challenged with more acute and immediate concerns. “Group health sucks all the oxygen out of the room” when Curt Brown, director of ancillary products for the Beachwood, Ohio-based Todd Associates, Inc. benefits brokerage firm, meets with many of his clients. Brown and others offer a variety of reasons why employers cannot afford to ignore DI, however.

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For starters, they say, if employers don’t either include it as an employer-paid or voluntary benefit, many employees will balk at paying for the coverage. Individual DI policies tend to be purchased only by people who have personal experience with disability, or highly paid and sophisticated professionals.

One reason lack of DI coverage is problematic is evident in the statistics typically given in sales presentations. According to the American Payroll Association, 71% of Americans live paycheck to paycheck. In addition, the Social Security Administration estimates that nearly one-fourth of today’s 20-year-olds will become disabled before the age of 67.

What if one of those people happened to be your boss, asks Myron Jucha, president of Brooks, Jucha & Associates in San Diego. “If your boss became disabled, do you think you would reduce his salary?” – a scenario he poses when talking to employers.

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But if the company comes up with an informal, ad hoc solution to compensating a disabled senior executive, in the absence of a salary continuity agreement the company could not take a tax deduction for those payments, and the executive would be deemed to be receiving taxable dividends, Jucha says.

Even if an employer had a self-insured formal salary continuation plan in place, in the absence of an insurance company, the employer would be in the business of claims adjudication. That can be tricky enough when it involves rank and file workers, but doing so for executives can be particularly challenging, DI carriers say.

DI carrier support

Also, disability carriers can simplify employers’ compliance with HIPAA’s health data privacy requirements, notes Kathy Plummer, a product director and disability products specialist for UNUM. These carriers have sophisticated return-to-work programs to transition employees off disability as soon as medical conditions allow.

The proportion of UNUM’s employer clients that offer DI on a voluntary basis has approximately doubled over the past 20 years, although the majority still contribute some if not all of the cost of the benefit, Plummer says.

When employees do pay their own premiums, however, any benefits they receive are not subject to income tax, since they would have paid the premiums with after-tax dollars. In contrast, employees are taxed on disability benefits attributable to employer-paid premiums.

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Hybrid arrangements are also possible, in which the employer pays for a barebones group LTD program, and employees can “buy up” to improve the coverage. Under that arrangement, a disabled employee receiving payments from a policy is taxed only on the amount attributable to the employer’s share of the premium.

If employees’ only alternative were to buy DI in the individual coverage market, they’d typically pay substantially more (as much as double) the rate obtainable from a voluntary group arrangement – assuming they could buy it at any price. That’s because group voluntary plans (as with employer-paid plans) are generally offered on a guaranteed issue basis; no medical qualification required.

Often voluntary DI build on a group platform can be converted to individual coverage by employees if they leave the company. However, they would face a change in premiums, and possibly face underwriting requirements.

Enrollment success matters

Even when DI is offered on a voluntary basis and the chosen carrier bears the brunt of the effort to get employees covered, the success of that enrollment should be important to employers. Low enrollment not only means few employees are protected, but a low-enrollment voluntary benefit can simply clutter up the voluntary menu, to the detriment of the entire program.

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If low enrollment is a problem, what’s an acceptable level?

While there are no absolute standards, at Principal Financial Group, 40% is a good benchmark, according to Tyler Matheny, the company’s assistant product director for Group Disability. It also happens to be the average enrollment rate for Principal’s voluntary group disability clients.

A “very good” enrollment rate would be 60%, Matheny believes. And that number is achievable when employers, leveraging resources available from brokers and carriers, make it a priority, he maintains.

Making the pitch

Although web-based educational tools and enrollment mechanisms work wonders for some benefit categories, disability income often requires more direct action, in the form of group or even one-on-one meetings. What can make those meetings successful?

A tried-and-true approach involves opening the presentation by asking employees, “What is your most important asset?”, says Curt Brown, director of ancillary products for the Todd Associates, Inc. benefits brokerage firm.

Over the years, Brown has heard some interesting answers. “Once a guy told me it was his hunting dog,” he recalls.

The “correct” answer he tries to steer them towards is their ability to earn an income to support themselves and their (possibly future) family. “I will say, ‘if you’re working just for fun and don’t need to work to pay your bills, then you don’t need disability insurance.’”

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Once that lesson is imparted, he sometimes needs to respond to the suggestion that Social Security’s disability program will provide the needed financial back-stop. “That program is in absolute chaos, and underfunded,” he tells them.

Getting prompt consideration for one’s case is highly unlikely, and the rejection rate is very high, Brown says. He also believes the denial rate will climb as federal budget constraints become more acute. Finally, it is only available in cases of permanent disability.

Puerto Rico and at least four states – California, New York, New Jersey, and Rhode Island –have mandatory state-administered disability programs. They do not compete, however, with long-term disability policies. California’s, for example, covers half of an employee’s pay, ending after 13 weeks.

Leading employees to purchase DI coverage requires more than a recitation of sobering facts and alarming statistics. The key to effective communication, advises Kathy Plummer, director of disability products for UNUM, is to give employees “a real solid view of their position” so that they can relate to the need on a very personal level.

Making it ‘real’

“We try not to scare people, but to make it very real for them,” she says. Often that can be accomplished with the use of web-based tools and calculators that let them input their own data, including living expenses and savings, to see how they could –or could not – handle the loss of a salary over various periods of time.

What also helps people to see the value of DI protection is to have witnessed the financial fallout of the disability of someone they know. Myron Jucha, president of Brooks, Jucha and Associates, often asks employees whether they know anybody who has been unable to work for at least six months due to an accident or illness.

If they have, “I will ask how that impacted their lifestyle,” Jucha says. “Then I ask them about their own lives, and how they would be able to handle that situation. That makes it real for them,” he adds.

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It is also important to pull married employees’ spouses into the conversation. A non-working spouse often is more attuned to the consequences of their spouse becoming disabled, if only for several months.

Materials can be made available to spouses in whatever format is suitable (e.g. printed or web-based), just as it must be for employees.

Information about available DI coverage, as with communications regarding all other employee benefits, “should be highlighted and explained throughout the year, not just during the open-enrollment period,” advises Dan Lyons, a senior vice president and national accounts manager for Liberty Mutual, a large DI carrier.

“Beyond encouraging participation, such education, particularly when combined with an employee feedback mechanism, helps to identify opportunities to measure and improve program effectiveness,” he adds.

Competing benefits

Such feedback can be particularly helpful in light of the fact that when offered on a voluntary basis, DI typically “competes” with a variety of other benefits – and sometimes not very well.

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In the absence of, or prior to an effective educational effort, “if you asked employees, ‘would you rather have a dental plan or a disability plan,’ they’ll say dental,” says Brown. The reason, he maintains, is because they know they are going to need a dentist, but don’t necessarily believe they will ever be disabled.

“We have to help them understand that with dental, they might get as much as $1,000 a year in benefits, but for the same premium, you could be on disability for 30 years.”

Brown also often needs to make another point when addressing white collar employees. “Many of them think disability is meant for people who work in dangerous jobs,” confusing DI with workers’ comp. What they need to be thinking about, Brown says, is “cancer and soft tissue injuries.”

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The prospect of cancer brings to mind critical illness coverage specifically tailored to providing income to patients with cancer and other disabling conditions. But when Brown prioritizes categories of voluntary benefit coverage, DI is at the top of the list, followed by life insurance.

“Next I would rank other catastrophic coverages like accident and critical illness, taking into consideration an employee’s out-of-pocket expenses with their health plan.” 

Lower on Brown’s voluntary benefits hierarchy are dental and vision. The expenses they cover, he maintains, “are entirely budgetable, specifically when using a flexible spending account.”
Still, guiding employees towards obtaining DI coverage does not require diminishing the potential value of other voluntary benefits, but simply helping employees to make wise decisions for themselves, Brown adds.

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