Disability Benefits Enable Firms to Be More Worker-Friendly

As the labor market tightens, California employers of all sizes compete to attract and keep good people. A useful tool to that end is group disability insurance.

To many employers, good group insurance means good group health and term life insurance. Disability insurance is a far less popular option, and many small and mid-size companies never consider it.

They should. Widely available and reasonably priced, disability insurance protects the individual against the loss of income that can follow serious illness or injury, whether suffered on the job or not. (Workers’ compensation insurance covers the individual only for work-related illness or injury and commonly pays a lesser benefit than group disability insurance.)

In addition, since disability is a far greater threat to the individual than death at any given age, disability coverage is far more valuable to the average employee--especially the average young employee--than group term life insurance.

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According to the National Assn. of Insurance Commissioners, a 35-year-old man stands a 19% chance of becoming disabled for 90 days or more before age 65. A 45-year-old stands an 18% chance, and a 55-year-old stands a 13% chance. The figures for women are worse: A woman of 35 has a 29% chance of disability before she turns 65. At 45, she faces a 24% chance and at 55 a 15% chance.

By contrast, a man age 35 stands only a 0.2% chance of dying in that year. A man age 45 stands a 0.45% chance and one 55 stands a 1% chance of dying. For women, the numbers are 0.17% at age 35, 0.36% at age 45 and 0.7% at age 55.

These numbers skew the picture slightly. Those for disability look at the risk over many years, while those for death consider the risk for only one year. Even when you take that distinction into account, disability is the far greater threat at any given age, and you do your employees a valuable good if you offer them solid protection against it.

Another factor comes into play here: Medicine is a science now, not an art. People survive many illnesses and injuries that proved fatal a generation ago--in many cases, only to live on in debilitated condition.

Actuaries describe this phenomenon by saying mortality is down and morbidity up. What they mean is illness and injury don’t kill people at young ages anymore. Illness and injury disable people, sometimes seriously, and for long periods.

Employers fight this trend by engineering the workplace to make it safe for the employee. They can give their employees a means of fighting the devastating economic consequences of illness or injury--namely the loss of income--with disability insurance.

“For any employer--especially one whose work force is growing rapidly--now is an excellent time to consider introducing a group disability plan,” says David A. Lusk, a principal in the Los Angeles office of consulting firm Deloitte & Touche, which counsels large employers on group insurance of all kinds.

“In a tight labor market, employers need to do as much as they can to provide a broad package of group benefits to their employees. To the employee who becomes disabled, group disability coverage is often more important than group term life insurance.”

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What makes for good group disability coverage?

For starters, the insurance should cover both short-term and long-term disability, Lusk says. Short-term disability protects the income of the ill or injured worker for up to six months, and long-term disability kicks in thereafter.

Long-term disability insurance should cover the worker for at least two years and preferably five, Lusk says. Cost often governs the decision, however. The longer the benefit period, the higher the premium. In any event, benefits should equal 60% of gross income, or about $30,000 for an employee earning $50,000 annually pretax, Lusk says.

Good insurance comes with what insurers call an “own occupation” definition of disability, meaning that it pays a benefit if the disability leaves the person unable to engage in his or her particular occupation. Many insurers, however, limit the risk by specifying that the disabled worker will continue to receive benefits after a certain period--often two years, sometimes five--only if the disability leaves the individual unable to engage in any occupation for which he or she is reasonably fitted by education, training or experience. Some restrict benefits to workers disabled by stress-related disorders and sometimes by soft-tissue injuries, including back trouble and repetitive-motion injuries.

As you might expect, good coverage doesn’t come cheaply. By and large, when it comes to disability insurance, you get what you pay for. Very large employers--that is, with more than 5,000 workers--negotiate premiums that reflect their experience, and if they manage workplace safety effectively, they can cut premium costs significantly.

For small and mid-size employers, price often drives the decision of whether to offer disability coverage as an employee benefit. Many companies overcome this hurdle by requiring their staff to pay part or all of the premiums. The good news in this arrangement is that the employee receives benefits free of income tax to the extent that he or she pays the premium. In plain English, if the employee foots the bill for the coverage, he or she collects benefits free of income tax. Conversely, to the extent that the employer foots the bill, the benefits are taxable.

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Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.