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October 1995

Disability - The Problem

The odds of being disabled for an extended period of time before age sixty-five are greater than the odds that you will die before age sixty-five. The younger you are, the greater the odds.

 

Source: 1971 Modification of the 1994 Commissioners Disability Table

From the above, you can see that a person 25 years of age has a 50% chance of being disabled for 90 days before reaching the age of 65. Statistically, most long term disabilities that occur at a younger age are the result of accidents. Most people do recover from a long term disability. However, the longer a disability lasts the less likely one is to recover. Biological death occurs at one specific instant in time and is final. Economic death caused by total disability is frequently a gradual process as to its start and its end. Some people recover quickly, while others never recover at all.

The following table from a study by the Society of Actuaries shows the high probability that an individual will still be disabled two years and five years after a disability that has lasted one year.

After Two Years

After Five Years

If you consider the possibilities when multiple lives are involved, the odds of a Long Term Disability occurring increase dramatically. Consider the possibilities involving spouses, partners, and employees. The tables on the following page illustrate the odds of at least one Long-term Disability occurring before Age 65 expressed as the number of chances out of 1,000.

Two Lives

Three Lives

Source: 1964 Commissioners Disability Table

Many employers provide their employees some form of wage continuation. The amount and duration varies.

Most long term wage continuation plans are less than five years duration. The longest go to age sixty-five. It is expected the pension plan will provide benefits beyond age sixty-five. You can generally replace 66-70% of pre-disability income. Most employers (99.9%) do not provide medical coverage for disabled and or their families. Expenses go up during a disability. In severe disabilities a spouse cannot work to supplement income, either because they are already working or are needed to provide care to the disabled. Medical plans do not provide rehabilitative benefits if the prognosis does not demonstrate that the improvement or recovery will respond in a very short period (i.e.: 30-90 days). Pension contributions cease when a person is no longer working and many pension plans do not provide a disability option. Social Security Disability Benefits are hard to secure. Medicare and Medicaid benefits are being restricted. All savings are depleted within six months.

Since most accidents occur in the home, you cannot rely on workers compensation or other peoples’ liability insurance to provide you with what you will need to survive at some semblance of your current standard of living.

Disabilities are divided into two categories: A Short Term Disability is one of less than ninety days and a Long Term Disability is one greater than ninety days.

Short Term Disability

Short Term Disability Insurance can cover the period of disability up to twenty six weeks following the disability. It has a liberal definition of disability and may require a short period deductible or period of elimination. (i.e., No benefits during the first seven or fifteen days.) Several states: New York, New Jersey, California, Hawaii and Puerto Rico, require that an employer provide STD for specific periods.

Many employers provide this coverage for short duration either through sick leave or self-insured plans. Short Term Disability Benefit policies and procedures in many companies are often unclear and left to the discretion of the employee. This opens the door to misunderstanding. Employers have no clear idea as to the expected recovery time for most disabilities or the costs involved. As a consequence, they generally overpay an average of 20-25% in salary continuation each year for employees’ short term absences.

Long Term Disability

The most devastating consequence of any illness or accident is Long Term Disability. If you review the above statistics, you begin to appreciate that 5% of all disability claims account for 95% of all paid disability benefits. When selecting a Long Term Disability policy it is essential to consider what constitutes disability. Is the disability tied to the current occupation, any occupation or some other standard? What offsets the benefit? What is the duration? There are over seventy provisions and each one has variations. According to the US Housing and Finance Agency, 48% of all home foreclosures are the result of a disability. By contrast, just 3% are the result of death. This one benefit, after good major medical coverage, is the most important benefit an individual needs. If you do not have your income, what does it matter if you have a home, auto, jewelry, and a college fund?

Enhanced Long Term Disability

When combined with group LTD benefits, enhance LTD replaces 80% to 100% of salary. By offering additional income protection during the working years as well as the opportunity to purchase long term care insurance, Enhanced LTD provides a continuing remedy for financial pressures facing employees with severe disabilities.

For employers with poor LTD experience, this may be a way of reducing one benefit and maintaining the level of benefits.

Long Term Care

Who pays for long term care? Long term care extracts two kinds of costs: the first is financial and the other, all too human.

In dollars and cents, long term care is likely to be an enormous financial burden to most people. Estimated annual costs to care for an individual include:

Many people wrongly assume that health insurance or a government program will always pay these costs. As the following graph shows, however, individuals and their families often bear the brunt of these expenses.

Government assistance is available only on a very limited basis—and individuals usually "spend down” their assets in order to qualify.

Medicare

Many people believe that Medicare will pick up the tab for long term care. Medicare does not cover custodial care, that is care that can be provided by someone without professional training.

Medigap

While insurance coverage is designed to supplement Medicare and does fill some "holes”, it typically does not cover long term care services.

Medicaid

Sponsored by both federal and state governments, Medicaid is a program designed for low income individuals. Consequently, to qualify for Medicaid payments, an individual must generally be at or below federal poverty level, which varies by state. This means an individual must deplete virtually all assets, often by paying for the cost of long term care, before Medicaid will take over.

The human cost

While the hardship to an individual receiving long term care is obvious, the ordeal facing family members, friends and other informal care givers can also be severe. Indeed, providing care is more often a highly personal responsibility than an institutional role.

The "Sandwich Generation”

Traditionally, women have had the responsibility of providing care for their own (and often their spouse’s) aged and infirm relatives. The proportion of caregivers who are working women has a significant impact on long term care and how it is provided.

The vast majority of women who are in the "sandwich generation” — those people age 35-54 who are caring for their children and their parents at the same time — also work outside the home.

Not only the elderly

Clearly, the need for long term care insurance extends to the younger segment of the population as well as the elderly. It is a need felt as acutely by many caregivers as by the individuals receiving care. Long term care coverage can ease the burdens felt by all the diverse groups impacted by serious illness, injury and the effects of aging. It is one of the most effective tools in protecting against a situation that will touch a large segment of our population and consume an increasing share of our nation’s wealth.

Long term care insurance is becoming increasingly attractive from three perspectives:

• Whether purchased individually or as a part of a group plan, it helps protect the insured’s family from the financial burden of nursing home or other extended care.
• It protects the insured from a situation in which he or she would have to spend down all assets in order to receive financial assistance.
• An employee whose parents are covered by long term care insurance is relieved of a key pressure plaguing workers who are caring for both their parents and their children — financial and psychological concerns that can severely impact productivity.

Spouse Disability Insurance

What happens when a spouse suffers a serious disability? Frequently, the family faces a broad range of concerns that can dramatically impact productivity. If the spouse works outside the home, there is likely to be a loss of income, even if the spouse is insured at his or her job. If the spouse is not employed, there may be a range of tasks that contribute to the family’s well-being that the spouse can no longer perform. There may be care-giving expense — or the spouse that is not disabled may have to take a temporary leave from his or her job.

Spouse Disability Insurance pays a benefit of up to $2,000 per month for twenty-four months, after the spouse has been seriously disabled for sixty days. Unlike your Long Term Disability (LTD) Plan, which defines disability based on the employee’s ability to work, Spouse Disability benefits are paid based on the spouse’s ability to live independently. This definition of disability better reflects the special situation of the disabled spouse and the need of the employee. To receive benefits, the spouse must suffer a cognitive impairment or be unable to perform two of Six Activities of Daily Living (ADLs): bathing, dressing, toileting, transferring, continence and eating.

Equally important, the employee’s family can use monthly benefits to pay the expenses that they decide are most important.

Eldercare Programs

Broadly defined, Eldercare is any assistance given to an elderly person. However, employer-sponsored eldercare assistance does not usually focus directly on caring for the elder. Instead, it is directed to employees with eldercare responsibilities and can include a variety of organizational initiatives that can be collectively defined as an eldercare program. Demand for workplace eldercare programs is largely the result of two trends — the aging US population and a changing workforce. Aging is accompanied by increasing dependence on others. The growing size of the elderly population increases the incidence of those who require eldercare assistance. A second trend — the changing workforce — is a more immediate challenge. Studies predict the workplace will change during the 1990’s as more women enter the workforce. The prospect of more women in the workforce has significant ramifications for eldercare programs since, as we discussed earlier, women tend to be the primary caregivers of the dependent elderly. The increasing role of women in the workplace will increase the overall need for eldercare assistance.

Eldercare programs take on various forms to meet divergent needs. However, components of employer-sponsored eldercare programs fall into two categories — human resource policies that offer employee caregivers flexibility over work schedules and employee benefits that provide direct assistance.

Eldercare is a relatively new frontier for employers. Although some question the legitimacy of eldercare as an employer’s concern, few would disagree that eldercare is an employer concern to the extent that it affects an organization’s ability to attract and retain productive employees. On this point, it seems likely that eldercare will become an increasingly important issue for organizations as they strive to help employees balance work and family responsibilities.

Retirement Income Protection

In order for a true Long Term Disability Program to provide a life time of benefits, it is necessary for the pension, savings, profit sharing and/or 401(k) plans to continue to be funded to completion.

Up to fifteen percent of an individual's disability benefit can be paid to a retirement plan in order to help complete the funding at age sixty-five.

The failure to complete retirement plans may mean that an individual will only be able to rely on their reduced social security benefit.

Revenue Protection Benefits

When a revenue-producing individual is disabled, your business can suffer a loss of income as well as the loss of an employee. This benefit can lessen the financial impact on your business as well as the additional expense to train an individual and lower productivity until they are trained.

While an individual is receiving disability benefits under a Long Term Disability Policy, an extra monthly benefit can be paid for up to twelve months to your business. This benefit will be applied solely for the benefit of current active employees.

Non-revenue producing employees have an impact as well. You may have to hire temporary replacements while continuing a non-funded salary continuation plan and making on-going medical contributions. A replacement employee may only be available through an employment service or at a premium compensation level.

Employee Assistance Plans

Sometimes the factors that lead to declines in an employee’s productivity are less than obvious. Indeed, they may be very private. Sometimes, the employee is the only one that knows there is a problem, the only one who can take the first step to change the situation.

One of the primary goals is to help you retain and regain productive employees. One of the most effective ways to do that is through a comprehensive Employee Assistance Program. This confidential assessment and referral resource is designed to help employees balance work and family life, and cope with the mounting array of personal and family work pressures.

Employee Assistance Programs provide assistance with matters that include:

• family relationships,
• alcohol and drug use;
• work-related stress;
• depression;
• financial concerns;
• legal matters;
• marital problems;
• sexual harassment;
• job discrimination;
• elder-and-child care issues; and
• mental health problems

The benefits of an EAP to a troubled employee are obvious, but they also translate into a value for your company by:

• keeping the employee fully productive, and in the worst case, avoiding replacement and retraining costs;
• helping you control your disability and health care costs; and
• providing an effective and efficient tool to help you manage complex employee situations.

McDonnell Douglas Corporation analyzed the return on investment from an EAP and found it saved $4 for every $1 spent. General Motors reported a 2 to 1 return on EAP services.

In short, hundreds of employers, and thousands of their employees, have discovered that an EAP program delivers value far beyond mere dollars and cents. Workers with EAP’s are 33% less likely to report stress-related illnesses.

Social Security Disability

In order to qualify for Social Security Disability Benefits, a person must meet a very stringent definition of disability.

The inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted or can be expected to last for a continuous period of twelve months or to result in death. The impairment must be so severe that the individual is unable to engage in substantial work that exists in the National economy....

In 1983, of the 1,338,043 claims made to social security, only 32% were allowed. After further consideration, appeal and court decisions, another 18% were allowed and that was after a lengthy appeal process. Since 1983, the criterion has become more stringent. The upshot is Social Security Disability Benefits cannot be relied upon to be a primary source of income.

Workers Compensation

If the cause of disability is not work related, no disability coverage would be available under Workers Compensation Insurance. Workers Compensation and other government mandated benefits are only available if a disability is occurs in a specified circumstance. It cannot be relied upon to replace lost income. That is the reason the above plans provide for social security, workers compensation and other government program offsets for a lower premium.

Sick Leave Banks

Leave Bank is a generic term that at most indicates that some kind of leave exchange is in operation. A more accurate general term would be "leave sharing”.

Leave Sharing programs enable employees to donate annual or vacation leave to have a leave pool from which other employees may draw when personal or family leave emergencies arise.

Leave Sharing can be accomplished though leave transfer programs in which members simply donate leave to those in need without other obligations or through leave banks in which workers must contribute some leave to qualify for participation at a later date.

Designing a Comprehensive Income Replacement Program

• Short Term Disability
• Long Term Disability
• Enhanced Long Term Disability
• Spousal Disability
• Eldercare
• Retirement Income Protection
• Long Term Care
• Employee Assistance Plans
• Revenue Protection Plans
• Sick Leave Bank

To integrate a comprehensive approach to this long overlooked need takes time, desire and dedicated advisors. We at The McLaughlin Company and Creative Risk Management are in a position to help you arrange the most effective program you can imagine. We are concerned that when you need your income the most, it may not be there.

The following questions need to be answered.

• Who will be eligible for benefits?
• How will eligibility be determined?
• What services will be covered?
• What benefits will be payable?
• What limits will exist?
• How will the plan be financed?
• How much can employees afford?
• How will the plan be administered?
• Who will underwrite the plan?
• How should the pension benefits be coordinated?

Not every person will or can have all the elements described in this issue, but an integrated approach should be looked at. Many of the elements need to be coordinated because different definitions and administration can trigger different results. We have one client that allows the trustees on the pension plan to define whether a participant is disabled. They need to be very liberal in allowing benefits due to their fear of discrimination suits.

Continuation of Health Insurance

At least three jurisdictions (Connecticut, Rhode Island and the District of Columbia) have included or have attempted to include language in the workers' compensation statutes providing for the continuance of medical insurance. The D. C. provision was struck down. We believe the solution to this problem is in the disability plans, and not the Workers Compensation laws. Is the need any less if a broken hip is the result of skiing as opposed to an on the job injury?

The charts below illustrate some of the decisions that must be made in order to design a program that fits your specific needs. These are by no means the only decisions. Most of the benefits which are described are also available on an individual basis.

We have also included an example of what the premiums for a range of benefits might be. The example is based on a professional service organization of moderate size. The premiums are expressed as a percentage of payroll.

We will be happy to help you design a disability program that meets your individual needs.

Remember, after a loss, not one asks what the insurance cost!

Sample Premium
Type of Benefit	Level of Benefit
	Modest	Rich
Short Term Disability
Long Term Disability
Enhanced LTD
Spousal Disability
Retirement Protection
Revenue Protection
Employee Assistance Plan
Total

 

Disability

Benefit Percentage	Maximum Benefits
Elimination Period	Benefit Duration
Social Security Integration	Workers Compensation Integration
Survivor Benefits	Mental & Nervous Coverage
Drug & Alcohol Coverage	Pre-Existing Limitation
Own Occupation Coverage	Partial Disability
Residual Disability	Work Incentive Benefits
Child Care Coverage	Family Leave Coverage
Employee Assistance Program	Maternity Coverage
Minimum Benefits	Rate Guarantee
COLA	Living Benefits
Employer Contribution	Eligibility
Specific Indemnity Benefits	Disability Offset Freeze
Rehabilitative Employment	Commissions
Group Retirement Plans	Recurrent Disability
Specific Loss Benefit	Child Care Benefits
Employer Social Security Tax & Reporting Benefit	Supplemental Pension Benefit
	Conversion Privilege

Exclusions
Intentionally self-inflicted Injury	An Act of War
Committing a Felony	Participation in a Riot
An Injury or Sickness While Confined in any Penal or Correctional Institution	Mental, Nervous, or Emotional Diseases of Any Type
Pre-Existing Conditions

Pension Contribution Option
Money Purchase Pension Plans	KEOGH or HRIO Plans
SEP’s	TSA’s
TDA’s	ESOP’s
Profit-Sharing Plans	401K Plan

Sick Leave Bank
Administrative Procedures	Establish a Trust
Mandatory/Voluntary Donation	Limits of Duration
Define Medical Emergency	Termination of Participation
Define Family Member	Rules of Notification
ERISA Issues	Tax Issues

 

Long Term Care

Company Salary Levels	Demographics: Age, Male, Female
Client Industry	Regional Cost of Nursing Homes and In-Home Professional Caregivers
Regional Availability of Long Term Services
100% Employee Paid	100% Employer Paid, No Employee Buy-Ups
100% Employer Paid Base Plan with Medically Underwritten Buy-Ups Options	100% Employer Paid Base Plan with Guaranteed Issue Buy-Ups Options
Employee and Spouses	Retirees and Spouses
Parents, Grandparents, In-Laws, and Spouses
Monthly Benefit:	Minimum? Maximum?
Guaranteed Issue:	Employee? Spouses?
Benefit Trigger Options:
Loss of 2 of 6 ADL’s	Loss of 2 of 6 ADL’s or Cognitive impairment

ADLs (Activities of Daily Living)
Bathing	Dressing
Toileting	Transferring
Continence	Eating
Mobility	Taking Medication
Stand by Assistance	Cognitive Impairment
Alzheimer’s Disease	Multi-Infarct Dementia
Parkinson’s Disease
Elimination Period Options:	30, 60, 90, 120, 180, 365 or 730 days?
Benefit Duration Options:	2,3,4,6,10 Years? Unlimited?
Inflation Protection Options:	Simple, Compound, Scheduled?
Accelerated Payment Option
Paid Up Benefit?
Portability:	Waiver of Premium

Exclusions
Confined for Acute Care	War
Suicide/Attempt	Felony/Committing/Attempting
Alcoholism or Use of a Controlled Substance	Confined Outside the United States
Psychological or Psychiatric Conditions

# # #

SOLUTIONS is a service of The McLaughlin Company and Creative Risk Management, Inc.—offering you timely and creative solutions to all your INSURANCE and RISK MANAGEMENT needs.

THE McLAUGHLIN COMPANY

CREATIVE RISK MANAGEMENT, INC.
1725 DeSales Street, NW
Washington DC 20036
Fax 202-857-8355 - 800-233-2258 - 202-293-5566

info@mclaughlin-online.com