Are you really doing yourself or your employees a favor by providing employer-paid group long-term disability (LTD) insurance coverage? You betcha. Well, maybe. Most dentists and their employees wouldn’t have income protection coverage at all if it weren’t a company paid benefit. Most employees either can’t afford it, haven’t recognized it as a real need, or don’t believe they will ever become disabled. But are the employees or you really receiving a favor? Perhaps not, and if more dentists knew of the many deficiencies of these group plans, they might examine some other options.
This article discusses group LTD plans vs. association plans, Most group plans are more consistent with each other in terms of deficiencies than they are with plans offered by associations, which may have more variations but more shortcomings and deficiencies.
Underwriting (information that can affect the issuance of coverage) Underwriting a disability insurance application, either for group LTD or association coverage, is typically less involved when compared to underwriting individual plans. Individual plans require much more underwriting (health, financials, duties, etc.) due to all of the guarantees and liberal wording in the contract, all of which allow a claim to be paid under more circumstances and conditions. The liberal wording is lacking in all group and most association coverage. On the other hand, some of the reasons why group/association plans have less underwriting is because if the claims experience of the carrier becomes too high, thus reducing the carrier’s profitability, one of two actions can result: a) the plan can get unilaterally canceled by the carrier or, b) the carrier can raise the rates (that are not guaranteed like individual plans). Neither of these is a pretty picture.
Coverage might be issued on a guaranteed basis by group/association LTD plans, and this can be very desirable, especially if an association member or employee of a company that is applying for group coverage is either uninsurable or has a pre-existing condition that would normally be excluded from coverage under an individual plan.
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Disability income protection
However, a word to the wise in connection with pre-existing conditions when applying for any type of coverage. The applicant must fully disclose all pertinent information on the application. Omissions, misstatements, or fraudulent statements can cause a claim to be denied or a policy to be rescinded. I know this firsthand, because over the years I’ve been called in as a claims expert witness/consultant in dozens of lawsuits to help claimants overturn inappropriately denied claims.
I know this firsthand, because over the years I’ve been called in as a claims expert witness/consultant in dozens of lawsuits to help claimants overturn inappropriately denied claims.
Policy wording (Governs the conditions under which a claim will be paid)
Definition of total disability - Generally speaking, all definitions, terms, and conditions in an individual policy are more liberal vs. the restrictive and split definitions found in most group and association plans.
Mental and nervous – These subjective conditions are only covered for two years with all group and most association plans. For now, most individual plans are treating this condition like any other sickness and will pay benefits for the full benefit period.
Portability (Can an employee take the coverage elsewhere?)
This is a serious deficiency of both group LTD and association plans. Normally there is no portability at all. If a member leaves the group or is no longer in good standing with the association, coverage terminates, whereas individual plans have no such limitations.
Guarantees (Refers to rates and renewability)
Renewability – There are a couple of different contract types. Guaranteed renewable found in individual plans are the best, and are noticeably lacking in all group or association plans, which means coverage can be canceled by the carrier.
Premium – Only individual plans offer guaranteed rates and once again, if group association rates were guaranteed, the cost would be much higher than their initially published rates.
Participation (How much of salary will be covered)
Salary – Usually group LTD coverage is up to a maximum of 60% to 70% of wages, sometimes including commissions, normally excluding bonus, along with a typical maximum (cap) benefit amount of $5,000.
Bonus – This form of income is not usually covered by LTD, and as a result of this omission the insured, even those making less than $100K, will not receive their full 60% of coverage.
Offsets (Reductions to the benefit amount)
Standard offsets, or reductions to the benefit amount payable from group plans, are: worker’s compensation, Social Security disability, benefits received under a retirement plan that has been triggered prior to the retirement date. However, there are some carriers who might reduce benefits when there are benefits payable from an individual policy.
Conclusion
What can be done to fix some of the group/association coverage deficiencies? The easiest fix is to correct the reverse discrimination problem, and the way to do that is to have certain classes of employees opt out of coverage. Then have the employer provide a tax-free individual plan for the full amount the employee is eligible for, or provide a tax-free individual plan to supplement the taxable group coverage benefit. Another option is to raise the cap if that’s economically feasible.
While that takes care of the reverse discrimination and taxable issues, what about the other deficiencies, such as portability and rate and coverage guarantees? Unfortunately, there’s no cure for these deficiencies, and these are the reasons for the initial low cost of group/association coverage. However, in view of the low initial cost advantage of group plans, a small practice with low employee turnover may be better off getting an individual plan, even though these never increasing premiums are initially higher.
