I frequently advise my clients that one of the most important employee benefits policies (after health insurance) is Long-Term Disability or LTD insurance. We often refer to this type of policy as “Paycheck Insurance.” While a short-term illness or situation may cause an employee financial stress, such as recovering from surgery or the birth of a child, a long-term condition can be financially catastrophic. LTD insurance protects one of an employee’s most valuable assets; their paycheck! Unfortunately, as a benefits consultant, I see all too frequently the consequences of employees suffering from a long-term condition and the financial impact of being unable to work for an extended period.
LTD insurance typically begins six months after the onset of the illness or condition coordinated with the end of a typical Short-Term Disability (STD) policy. The duration of the coverage can be as short as two years or up until Social Security Normal Retirement Age (SSNRA). The shorter duration plans are extremely affordable and are designed to allow enough time for the affected employee to enroll in the Social Security Disability Insurance (SSDI) program which has a minimum wait time of five months. At the other end of the duration, SSNRA plans will cover an employee until they become eligible for traditional Social Security benefits. While SSNRA plans are slightly more expensive than plans with shorter duration, they are still extremely affordable and provide paycheck security for an employee essentially for the remainder of their life should the need arise.
There are many optional contract provisions that should be evaluated when putting together an LTD policy. Some of the more common items beyond duration of the policy are the percentage of pre-disability earnings that will be insured, is the coverage to be employee or employer paid, definition of earnings (what earning go to calculate total earnings such as bonuses and overtime), and provisions for what constitutes a disability pertaining to one’s profession. Developing a tremor may not cause an undue burden on an office worker, but a surgeon with a hand tremor most likely will not be able to work. Thus, it becomes crucial to define whether a disability is determined by the condition limiting ones “Own Occupation” or “Any Occupation.” I will discuss these items in another post.
Finally, I want to highlight an additional benefit to the employer beyond an employee recruiting and retention tool. Setting up an effective LTD plan can get your employees back to work. When negotiating LTD coverage, including “Return to Work” provisions is an important step. Typically, this allows an employee to gradually return to work without losing their LTD benefits. Perhaps the LTD compensation is 60% of pre-disability earnings. A common return to work provision will allow an employee to work part time earning up to 100% of their pre-disability earnings to encourage participation in their rehabilitation and return to work full time. This is a win for the employee and the employer.
LTD coverage is indeed one of the most important employee benefits outside of health coverage. While a properly designed LTD plan may not appear impressive, not implementing such a plan can be catastrophic and heartbreaking for impacted employees.