Employer-Sponsored Long-Term Disability Insurance
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Employer-sponsored long-term disability insurance Long-term disability insurance provides income for disabled workers until retirement or a specified age ; however, payments usually are offset by Social Security and other sources of disability income DIANE B. HILL Long-term disability insurance provides income to workers with these other sources of long-term disability income. whose earnings are interrupted by lengthy periods of disabil- This article describes the provisions of the plans and how ity. Benefits usually are payable until retirement, a specific coordination is achieved. age, or recovery from disability. However, benefits do not usually begin until short-term disability payments (sick Development of the plans leave or sickness and accident insurance) cease. Long-term In the 1950's, long-term disability benefits were gener- disability plans thus provide a bridge between short-term ally available only to middle and upper income employees disability benefits and retirement income . on salary. Also, restrictive length-of-service eligibility re- Long-term disability insurance is not the only source of quirements, such as 5 years, were imposed .2 But in the extended income replacement for disabled workers . State 1960's and 1970's, a variety of factors led to extending the workers' compensation programs provide benefits to work- benefits to lower income and hourly wage workers. ers disabled through occupational injuries or sicknesses . Growing concern about the adequacy of State workers' Similarly, most employees are covered by the disability compensation benefits prompted unions to seek additional insurance portion of Social Security, which provides income protection through collective bargaining. The extension of to workers and their families for both occupational and Social Security to include disability benefits in 1956 was nonoccupational disabilities . another factor influencing management to cover hourly In addition, private pension plans commonly provide for wage earners. Adoption of Social Security benefits height- disability retirement benefits . I Under plans with immediate ened interest in the disability plans and reduced employers' disability benefits, payments to eligible workers start at the costs for this benefit when provision was made for offsetting time the injury or sickness occurs. Plans with deferred ben- government payments . 3 efits, however, postpone payments until the normal or early In 1984, more than 22 million persons had long-term retirement age specified in the pension plan. Under deferred disability income protection . Of this number, 17 .3 million plans, employees who qualify for long-term disability pay- were under group insurance policies and 5.5 million had ments usually continue to earn credits for service in their individual policies . 4 This compares with a total of 3 million pension plans until the formal retirement date is reached. At persons covered in 1963, and demonstrates the rapid spread that time, the disability payments cease and pension pay- of such benefits in the last 20 years . Disability insurance ments begin. policies are generally purchased from life insurance compa- Long-term disability plans are almost always coordinated nies, but some are written by property and liability insurance Diane B. Hill is an economist in the Division of Occupational Pay and companies or by health insurers . These plans, however, are Employee Benefit Levels, Bureau of Labor Statistics . rarely self-insured by the employers . 16 Table 1 . Percent of full-time participants in long-term dis- Employee benefits survey ability insurance plans, by occupational group and length- of-service requirements in medium and large firms, 1985 This analysis is based on information from the 1985 Bu- Length-of-service All Professional and Technical and reau of Labor Statistics' survey of employee benefit plans in requirement' participants administrative clerical production medium and large establishments . 5 Data on 522 long-term disability plans were tabulated separately for full-time em- Total . 100 100 100 100 With service ployees in three occupational groups: professional- requirement . 69 68 72 66 1 month . 11 12 9 10 administrative, technical-clerical, and production . The first 2 months . 4 3 2 7 two groups are jointly labelled white-collar workers, in con- 3 months . 16 13 16 18 4-5 months . 2 1 1 4 trast with production or blue-collar workers. 6 months . 12 11 12 13 1 year . 15 18 19 8 According to the survey, long-term disability insurance, 2 years . 1 2 2 121 3 years . 2 1 3 1 wholly or partially financed by the employer, was available More than to 48 percent of the full-time workers. This was a 20-percent 3 years . 6 7 7 4 Without service increase since 1980, when the survey became fully opera- requirement . 31 32 28 34 tional.b The expansion of disability benefit coverage to ' Length-of-time employees must be on the job before they are covered by a plan that is at technical-clerical and production workers is as follows: least partially employer-financed . There is frequently an administrative time lag between completion of requirement and the actual start of participation . If the lag was 1 month or more, it was included in the service requirement. Percent of 2 Less than 0 .5 percent employee coverage NOTE: Because of rounding, sums of individual items may not equal totals. Percent Occupational group 1980 1985 change expected to last, at least 12 successive months. The condi- All employees . 40 48 20.0 tion must prevent a person from working not only in his or Professional-administrative . 62 64 3.2 her usual job, but also in any other substantial, gainful Technical-clerical . .0 50 61 22 work. A person's age, education, training, and work experi- Production . 27 32 18.5 ence are considered when deciding whether he or she can work. Eligibility requirements However, not all private plans require that employees be Before benefits are payable, disabled employees must totally disabled . Some provide for partial disability benefits . satisfy the eligibility requirements of their plan . Nearly 7 of Persons may be considered partially disabled (1) if they can 10 participants in 1985 were in plans that specified a mini- perform at least one duty of their regular occupation on a mum length of service before an employee was eligible . As part-time basis, or (2) if they are unable to perform regular table 1 shows, most participants were in plans with service duties but can perform duties of another occupation for requirements of 6 months or less, but one-quarter faced which they are suited by training, education, or experience . requirements of a year or more. This contrasts with life and Under this feature, a partially disabled person's benefit is health insurance plans, which rarely require more than 6 commonly reduced by 50 percent of earnings from employ- months of service .7 ment but the other 50 percent is retained to encourage such Disabled employees also may be required to fulfill wait- work . The employee's plan benefits continue as long as the ing periods before benefits begin-typically 3 or 6 months. new earnings are less than a specified percentage of predis- These initial months of disability, however, may be covered ability salary, for example, 80 percent . If the work is in by employer-sponsored sick leave or sickness and accident another occupation, benefits continue as long as earnings insurance, or both, thereby eliminating gaps in income pro- are less than a somewhat lower proportion of predisability tection against nonoccupational disabilities . (State workers' salary, say 70 percent. compensation programs cover the first 6 to 12 months of an occupational disability.) Benefit formulas A third eligibility requirement stems from a plan's defini- Long-term disability benefits are based on previous earn- tion of total disability. During the first 12 to 24 months of ings for at least 95 percent of plan participants. Virtually all sickness or injury, disability is usually defined as total if an plans define these earnings as an employee's straight-time employee is unable to perform his or her job. Afterwards, base pay as of the date of disability. Overtime, bonuses, the definition of total disability becomes more restrictive, shift differentials, or any other special forms of compensa- requiring that an employee be unable to engage in any gain- tion are not included . ful employment . About three-fourths of all participants covered by the The initial definition of disability under private plans is 1985 survey were in plans that provided benefits as a fixed less restrictive than the Social Security definition . Under the percent of earnings (table 2). Of these participants, four- latter, a person must be unable to do any substantial, gainful fifths were provided 50 or 60 percent of earnings in the work owing to a medical condition which has lasted, or is event of disability. These plans express the disability benefit 17 MONTHLY LABOR REVIEW July 1987 is Employer-Sponsored Disability Insurance as a fixed percent of predisability earnings, integrated with disability plan. The purpose of offset provisions is to pro- primary (individual worker) Social Security benefitss and vide an adequate level of replacement income, while avoid- payments from other government programs such as work- ing duplicative or excessive benefits (many of which are ers' compensation . Integrated formulas reduce disability already financed by the employer). payments by the amount of payments from the employee's What are the other sources of income which may offset primary Social Security (or Railroad Retirement Act) bene- long-term disability payments? They depend on the type of fits and other income sources. For example, an integrated plan . However, almost all of the plans in the 1985 Employee plan may provide a disability benefit of 60 percent of the Benefits Survey reduced benefits if payments from one or employee's monthly pay up to a specified maximum more of the following programs were received : primary or amount, but the benefit will be reduced ("offset") by Social family (dependents) Social Security, or some combination Security payments .