PRINT - Chapter 5
The important points addressed in this lesson are:

Disability income benefit sources include government programs, such as Social Security as well as non-governmental sources, such as employer-sponsored group insurance plans

All states sponsor Workers Compensation plans that provide disability benefits to covered workers disabled through job-related activities

In addition to Workers Compensation, six jurisdictions provide non-occupational disability income coverage

Employer-sponsored sources of disability income coverage include group insurance, association/franchise insurance and sick-pay plans


Governmental Programs

Social Security

There are a number of sources of income for the disabled individual, not the least of which are government sources.  Both the federal government and the states sponsor programs that may provide disability income.  Let's begin our look at these government programs with a consideration of Social Security disability benefits.

To understand the importance and relevance of Social Security disability benefits to an individual's financial security, it is important to obtain a sense of the likelihood of their being obtained.  In the case of Social Security disability benefits, the likelihood is small since the rejection rate for Social Security disability income benefits usually ranges between 60% and 70%.  It is the definition of disability that results in this remarkably high rejection rate.

Unlike the definitions of disability that appear in disability income policies, disability is defined-for Social Security disability income benefit purposes-as the individual's inability to engage in any substantial gainful activity.  In order to receive Social Security disability benefits, the individual must:

be unable to engage in any substantial or gainful work for at least 5 months before filing a claim, and
have a disability which has lasted or is expected to last at least 12 months or be expected to result in death

Not everyone is even eligible to receive Social Security disability benefits, however.  In addition to being unable to engage in any substantial or gainful work, the individual must:

have worked in a covered occupation, i.e. one in which deductions for Social Security benefits are made, and
be fully insured, which means that the individual must have worked long enough in a covered occupation

The amount of Social Security disability benefits that may be received by the disabled individual depends upon the individual's:

age , and
prior earnings

The individual's average indexed monthly earnings (AIME) and primary insurance amount (PIA) determine the amount of any benefit.  The AIME and PIA are calculated by incorporating the individual's past earnings history and factors that reflect current economic conditions.  

The amount of an individual's benefit also depends upon his or her family status.  A single individual with no dependents would receive a smaller Social Security disability benefit than someone with eligible dependents.

Social Security is the primary federal system providing disability income benefits.   There are several groups of employees, however, who are not included in Social Security coverage:

Federal employees covered under a separate plan
Police covered under municipal plans
Railroad employees covered under the Railroad Retirement Act.


Railroad Retirement Act

Two types of disability benefits are offered by the Railroad Retirement Act. These disability benefits are called disability annuities and are available to employees who have at least 10 years of railroad service.  The two disability annuities under the Railroad Retirement Act are:

The occupational disability annuity, and
The total disability annuity

The Railroad Retirement Act's occupational disability annuity applies if the employee's disability prevents him or her from working in his or her regular railroad occupation.  It is available if the employee meets three criteria.  The employee has:

Not attained retirement age
A current connection with the railroad industry
Completed 20 years of service (or 10 years of service and is at least 60 years old)

The Railroad Retirement Act's total disability annuity applies if the disability prevents the employee from working in any regular employment.  It is available if the following criteria are met.  The employee:

Is under retirement age, and
Has completed at least 10 years of service

Before payments can begin, a five month waiting period that begins the month after the month in which the disability began is required.  Benefits can vary significantly between employees since they are based on months of service and earnings credits.



State Programs

In addition to the federal programs providing Social Security and Railroad Retirement Act benefits, the states also provide certain disability benefits.  The two principal state programs that provide disability income benefits are:

Workers Compensation , and
Non-occupational Disability programs

Workers Compensation is the oldest social insurance program.  It was initially adopted in Germany in the late 19th century. The sole purpose of the Workers Compensation program is to provide benefits for job-related injuries and illnesses.

Although Workers Compensation is normally considered a state program, certain classes of workers, whose jobs defy state boundaries-seamen, railroad workers and federal government employees-are covered under federal Workers Compensation laws rather than state laws.

Workers Compensation provides an array of benefits in the form of:

cash payments, and
medical and hospital services

These benefits are provided to workers that sustain job-connected injuries or illnesses and are available to every worker.

Workers Compensation benefits are established by law and may be paid by the employer or by its Workers Compensation insurance carrier.  The benefits provided may be scheduled or non-scheduled.

Scheduled benefits are so called because the amount of benefit is set forth in a schedule that indicates the percentage of loss of use and portion of the body affected.  Scheduled losses may involve disabilities to:

· arms, hands or fingers,
· legs, feet or toes,
· eyes, ears or teeth.

Non-scheduled benefits are benefits for injuries or illnesses to parts of the body other than those defined under scheduled losses.  Payment of non-scheduled benefits is based on a percentage of the maximum weekly benefit available and is determined by the extent of the worker's disability.  

The actual schedules vary from state to state in accordance with applicable law.  There is one constant, however, with respect to Workers Compensation benefits: they are limited to those disabilities that are job related.

Disability coverage for job-related disabilities is required in all states. However, only six jurisdictions have compulsory non-occupational disability insurance programs.  These non-occupational disability programs provide short-term financial assistance for disabilities occurring off the job.  Their maximum benefit periods are limited to 6 months.

These six jurisdictions are California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island.

There are four basic characteristics shared by each of the non-occupational disability programs, although the programs otherwise differ to some extent:

Coverage is partly financed by employee contributions
Program benefits are coordinated with other benefits to which the recipient is eligible
The individual must have a work record to be eligible to receive benefits; the definition of "work record" varies among jurisdictions
The coverage is short-term

Each of these programs provides benefits for a maximum period of 26 weeks following a 7-day waiting period.  Since these are state programs, the benefits are mandated by the state and vary widely.  In some cases, they can be as much as 2/3rd of the recipient's average weekly salary to a stated maximum dollar amount.

As we noted, non-occupational disability benefits are usually coordinated with other benefits received.  For example, in New York, private salary or wage continuation plans may disqualify the worker from benefits under New York's non-occupational disability benefit program.


Non-Governmental Disability Programs

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.



Comparison
Group Vs. Individual Disability Income
Underwriting, Costs and Benefits

Category
Group Insurance
Individual Insurance
 Underwriting
 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
 Benefits
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
 Cost
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

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.


Summary

There are a number of sources of disability income benefits; they include both governmental and non-governmental sources.  The principal governmental source of disability benefits for those unable to engage in any gainful activity is Social Security.  Although providing a safety net for the profoundly disabled, Social Security's stringent definition of disability results in a claims rejection rate of more than 60%. All states offer Workers Compensation programs, and six jurisdictions provide non-occupational disability benefits.

Many disability benefits are employer-related.  They may be provided under true group programs or may be association plans, franchise plans or sick-pay plans.