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Employee Disability: A Personal and Financial Risk that Can be Mitigated

What does the disability of a key employee, including yourself, cost -- both in foregone income and lost productivity? Perhaps a lot more than you think, particularly if you have to bring in additional personnel to pick up the slack. So take a minute to make an estimate. If you are realistic, you will probably want to learn more about ways to mitigate the risk.

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Also, including coverage for short-term disability and long-term disability in your benefits line-up can make your company appeal to more prospective new-hires. This is true even if the disability coverage is primarily voluntary, which means the employees pay for it themselves. Group disability policies are typically easier and less expensive for employees to acquire than in the individual market, so employees can benefit even if they are picking up all or most of the tab.

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According to the Council for Disability Awareness (CDA), the average annual per-employee premium for employer-paid short-term disability coverage is $210, and $260 for long-term.

Average long-term disability premiums, as a percentage of employee income, are:

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• .50 percent for employer paid group;• .75 percent for group voluntary; and• Between 1.50 and 3.0 percent when purchased by the employee on

an individual basis from the insurance carrier.

Income Replacement

Recall that disability insurance doesn't pay for medical services, but, depending on the duration of the disability, replaces a portion of the insured's lost income. Short-term policies typically cover 13 or 26 weeks of disability, and kick in promptly, and long-term policies generally begin after 90 or 180 days. Short-term and long-term policies should be synchronized to avoid a coverage gap.

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Insurance companies that focus on the group side of the business generally include rehabilitative services in their packages, to accelerate disabled employees' return to work -- depending on the nature of the disability.

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The manner in which those services are offered often varies according to company size; larger employers might have a rehab specialist employed by the insurance company based at your site. The idea is to make disability expertise readily available not only to manage disability cases but to conduct programs intended to head off avoidable disabilities in the first place.

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Don't Count on Workers' Comp

Keep in mind, 95 percent of disabling accident and illnesses are not work-related, and therefore not covered by Workers' Comp. Also, 90 percent of disabilities are due to illness, not accidents, according to the CDA. The leading culprits: cancer, heart attack, diabetes, neck and back pain -- conditions (except cancer) which often are lifestyle related, and can be combated with effective health promotion programs (see table).

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Here are some more sobering statistics from the CDA:

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• Just over 25 percent of today's 20 year-olds will become disabled before they retire.

• Over 37 million Americans are classified as disabled; about 12 percent of the total population. More than 50 percent of those disabled Americans are in their working years, from 18-64.

• Nearly nine million disabled wage earners -- over 5 percent of U.S. workers -- were receiving Social Security Disability (SSDI) benefits at the end of 2012.

• In December of 2012, there were over 2.5 million disabled workers in their 20s, 30s, and 40s receiving SSDI benefits.

SSDI benefits are not the right solution for everybody, because the benefits tend to be relatively meager -- the average benefit payment last year was $1,130. Also, the application process takes months or even years, and the probability of receiving SSDI benefits tends to be slim, given pressure to limit federal spending during a time of gaping budget deficits.

Helpful Resources

Information about the prevalence of disability and disability risk mitigation is readily available. This includes steps you can take to promote employee health, as well as exploring insurance solutions. The CDA website, for example, features a page directed towards employees and individuals on "reducing your chances" of becoming disabled. It provides basic healthy living tips and links to additional resources on those topics. You'll also find a page listing additional resources, and research which highlights relevant studies. One study listed shows the gaps between what employers understand about disability and what employees actually believe about disability.

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Finally, it's important to know you can customize disability insurance benefits to some degree. For example, you can limit your program to cover premiums for key people on your staff. However, they must be selected as a group on an objective basis, if you design the program correctly in order to avoid discrimination accusations.

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There are also tax considerations. If the company pays the premiums directly, the covered employee is taxed on the value of the premium, and on the value of any benefits received. However, employers can choose to add to employees' salaries to offset the tax bite. If the employee purchases the policy on his/her own, any benefits received are not taxable.

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Whether offering short-term disability and long-term disability coverage is worth it in the end for your company will depend on many factors, not the least of which is cost. This is especially true if you are considering paying for the benefit. And the only way to assess the variable is to find a competent insurance adviser to review your unique situation and get some insurance quotes. Internet-based price quoting systems exist, but might not be as reliable or accurate as dealing directly with insurance professionals.

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