Non-governmental Programs

Employer Provided Group Plans

Although government disability programs help provide a safety net for the extremely disabled, it is only in the private sector that disability benefits come close to being truly adequate. One of the principal sources of disability income benefits in the private sector is employer-provided plans, and the most common employer-provided disability plans are group plans.

The principal benefits derived from group plans, when compared to individual plans, are:

Generally lower cost
Evidence of insurability is usually unnecessary.

State regulation generally controls the minimum group size for the purpose of purchasing group insurance.

Group insurance plans have participation requirements as a principal method of avoiding the problem of adverse selection-the propensity of sick people to purchase insurance.  Participation requirements differ between noncontributory plans-plans that are completely paid for by the employer-and contributory plans in which the cost is shared between the employer and employee.  Although 75% of eligible employees must participate in a contributory plan, the participation requirement for noncontributory plans is 100% of eligible employees.

Three benefit schedules usually available in a group disability plan:

Flat benefit amount
Earnings schedule
Occupation class schedule

In a group disability plan that is designed to provide a flat benefit amount,  everyone receives the same benefit.  For example, the benefit might be $500 per week.  Earnings schedule plans provide disability benefits that are related to the level of the individual's earnings, such as 60% of earnings.

Position or occupation class plans link benefits to the participant's position.  For example, officers receive 60% of earnings to age 65, managers and supervisors receive 60% of earnings for 5 years and all others receive 50% of earnings for 2 years.

Motivating the disabled group member to return to work is not dissimilar to motivating the individual policyowner.  The maximum benefit is usually not more than 2/3rds of the employee's regular wage, a level that is similar to the levels provided in the issue and participation limits we discussed earlier in connection with individual disability income underwriting.

A potential overinsurance problem may develop because of the nature of group insurance underwriting.  Group disability underwriting is done on the basis of the entire group; no individual underwriting is performed.  As a result, an employee who already has the maximum available individual disability income coverage could easily have 100% or more of his income replaced during a period of disability when a group disability plan is installed.  

The two broad categories of group disability coverage are:

short term, and
long term

 Short-term group disability coverage is characterized by:

Short elimination periods, that generally range from 0 days to 30 days, and
Limited benefit periods that normally are 13, 26 or 52 weeks

Long-term group disability coverage has longer elimination periods and longer benefit periods.  A typical long-term group disability plan may have:

Benefit periods of 5 years, to age 65 or for lifetime ,and
Elimination periods that are as short as 30 days to as long as 6 months, or longer.

A common approach is for an employer to provide short term coverage of 26 weeks with a 7 day elimination period for all employees and a long term disability plan providing a to age 65 benefit with a 6 month elimination period for all salaried employees. It is a two-level program in which everyone gets some benefit.  

We noted earlier in our discussion that one of the most important definitions in a disability income policy is its definition of disability.  Generally the same range of disability definitions is found in group disability insurance plans as is seen in individual plans.  The group policy's definition may be as restrictive as any occupation or as liberal as own occupation.  

Despite their similarities, there are a number of differences in group disability insurance when compared to individual policies.  The principal group differences are found in the areas of underwriting, costs and benefits.

Group Vs. Individual Disability Income
Underwriting, Costs and Benefits

Group Insurance
Individual Insurance
1. Group underwritten as a whole, generally by occupation or industry

2. Individual health, habits and current coverage usually not considered
1. Individually underwritten

2. Eligibility determined by health, habits, income, age, occupation and current coverage
1. Determined by occupation class, salary at claim time, or pre-determined level amount

2. Maximum benefit usually limited to $7,000 - $8,000

3. Usually coordinated with other employer-provided or government benefits, such as Workers Compensation and Social Security

4. Definition of disability often restrictive, frequently with a 2 year own occupation

5. Optional benefits usually not offered
1. Fixed dollar amount of benefit determined at time of application

2. Usually no coordination with other benefits (except for SIS)

3. May be adjusted by automatic increases or COLA adjustments

4. Maximum benefit often much higher than group benefits - up to $15,000 per month or more

5. Definition of disability much more liberal - own occupation for entire benefit period

6. Many optional benefits are available
1. Usually lower than for individual policies

2. Determined by the "group" composition

3. Often varies from year to year based on claims experience
1. Usually higher than for group

2. Determined by individual factors-age, occupation, health

3. Depending upon renewability provision, may be fixed for the entire policy period

Other Employer Provided Plans

In addition to true group insurance, there are two other approaches to providing employer-sponsored disability income benefits:

Franchise/association plans, and
Individual employer-paid policies

Not surprisingly, the minimum size group required for group disability insurance may create a problem for many small businesses and other groups that don't have a sufficient number of employees to qualify.  Sometimes franchise insurance that provides disability income benefits may be an answer.  In addition to overcoming the size issue, the principal benefit from this approach is a generally lower cost.

In a franchise arrangement each individual receives his or her own policy instead of a group certificate of insurance.  Additionally, the franchise group members may usually make some coverage choices-choices that are not normally offered to true group insurance members.  A key difference in franchise group arrangements is that insureds are usually required to provide evidence of insurability.  

Just as under the true group insurance arrangement, franchise group plans may be either contributory or noncontributory, and a single premium is generally paid for the entire group.  

Association plans provide a somewhat similar approach to franchise insurance.  In these plans, individual contracts may or may not be issued.  The individuals covered are usually members of a professional or trade association, and they typically remit premiums directly to the insurance company.  

Associations that might endorse this kind of program are the American Trial Lawyers Association or the American Psychiatric Association.  

The advantage of association plans lies in their lower initial premiums.  They do, however, have certain disadvantages:

Payment of benefits requires that the insured be a member in good standing at the time of claim
Premiums may be changed ,and
Coverage may be canceled for the entire group

A popular approach calls for the employer to purchase individual disability income policies for its employees, often under a sick pay plan.  A sick pay plan, sometimes called a salary continuation plan, is not generally used to cover all employees.  Instead, a sick pay plan is usually designed for selected employees under which a portion of their salary is continued in the event of disability.  An employer adopting a sick pay plan purchases individual disability income policies to fund its liability under the plan and pays the premium.  Benefits are normally payable directly to the insured employee in the event of his or her disability.