Group Disability Income Insurance
Employers know that benefits are crucial to attracting and retaining valued employees and protecting them and their families from financial hardships. A number of companies provide health, dental, vision and life insurance but overlook a critical element of a comprehensive benefits package – Disability Income Insurance.
Disability Income Insurance provides income replacement when insured employees experience a covered illness, injury or pregnancy. The coverage can help with financial obligations, such as mortgage or rent payments, that continue even when an employee can’t work – expenses that health insurance won’t cover.
The incidence of disability is greater than most people think. Consider these statistics:
- Disabilities affect one-fifth of Americans (approximately 5.4 million).
- One in 10 Americans reported a severe disability in 1994-1995.
- On average, about 2,340 disabling injuries occur every hour during the year.
- A disabling injury occurs every eight seconds at work.
- At age 35, a person has a 50 percent chance of being unable to work for more than three months due to a disability before age 65.
Long Term Disability (LTD)
LTD is the most popular coverage for employees. It covers an employee’s loss of income due to injuries or illnesses which prevent them from working. Benefits (income) generally start after a 90 day elimination (waiting) period and pays 60% of income until insured’s 65th birthday. This protects an employee’s income for the long term (until age 65).
Short Term Disability (STD)
These types of policies are geared to cover the immediate loss of income for an employee due to an injury or illness which prevents them from working. The policy can be set up to start paying benefits as early as the 1st day due to an injury or the 7th day due to an illness. The weekly income benefit (60%) can be paid up to 13 weeks per illness or injury. Maternity is generally covered as any other illness.
- U.S. Census Bureau, Americans with Disabilities, 1994-1995
- National Safety Council, 2001 Injury Facts
- Society of Actuaries, as referenced in Money, April 2000
Disability of a Business Owner
Business Overhead Expense Insurance
Another form of Disability Income Insurance specially suited to the business owner is Business Overhead Expense (BOE). BOE policies are designed to reimburse certain business expenses of the owner while he or she is totally or partially disabled. The funds provided by the BOE policy help the business survive during the time of the owner’s disability. Often, the BOE policy is the reason the owner has a business to return to after the disability. Should the disability appear permanent, the owner usually has additional time to make decisions regarding the future of the business.
Generally, there are only certain types of business owners who qualify for BOE coverage. These include owners of closely held businesses, owners of small businesses and professionals with their own practices.
Some of the expenses typically covered by a BOE policy include:
- Salaries of non-owner, non-family employees
- Legal and accounting fees
- Principal payments on debt
- Leased equipment
- Business insurance premiums
- Office supplies
- Professional dues
- Business taxes
- Workers compensation
In no instance is there any payment from a BOE policy to the business owner. Instead, these funds must come from his or her own disability plan.
Many business owners have established buy-sell agreements to protect one another and the business in the event of an untimely death. Very often these agreements are funded with life insurance to make certain that the necessary dollars are available at the time of death to purchase the business interest.
The death of a business owner can be devastating to the business and to his or her family. Yet, the probability of long-term disability prior to age 65 is greater than the probability of death. Frequently, however, the probability of a permanent disability is not provided for in the buy-sell agreements.
Business owners can amend existing buy-sell agreements or have separate agreements to provide for this potential disaster. There are special Disability Income Insurance policies which will fund the disability buy-sell. These plans are set up to pay a lump sum, a series of payments or a combination of the two.
Key Elements to Consider
Definition of disability: How disability is defined in the agreement is very important and should probably be tied to the definition in the Disability Income Insurance policy.
Elimination period: This is the period of time between the first day of the disability and the trigger date; e.g., 12 months to 24 months are frequent options.
Successive disability: This is the situation when a disabled person temporarily returns to work but thereafter has a recurrence of the disability. In many plans, the successive disability periods can be tied together to meet the elimination period.
Trigger date: This is the date at the end of the elimination period when the buyout begins and the insurance company begins paying on the policy.
Funding period: This is the period over which the buyout payments are made. It can be an immediate lump sum or spread out over a period of months; e.g., 12, 24, 60, etc., or a combination of both. The funding period specified in the policy should match the terms of the buy-sell agreement.
Recover from disability: The recovery of a disabled person after the buyout has begun can raise several questions, among them: Does the funding stop? Can the person return to work with the same company? Lump sum settlement plans, in some cases, can remove some of the uncertainty.
Buy-sell agreement: The buy-sell agreement must be in force at the time of disability in order for payments to be made from the policy.
Converting to individual coverage: Sometimes the disability plan will be convertible to individual coverage if the business has no further need for the coverage, the owner needs additional individual coverage, and he or she meets certain income, and possibly, physical requirements.
Involvement in the business: Many insurers require that the business owner be actively involved in the business.