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Employer Provided Disability Insurance: Know the Definitions

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It might feel like employer benefits are a maze of details and definitions that are far too complex. Employer-sponsored long-term disability insurance is no exception. The goal of today’s blog is to provide a guide to understanding the important elements of long-term disability plans and make the review process a little easier. The significance of long-term disability insurance is highlighted because earnings are usually an individual’s greatest resource and disability insurance can protect your income in the event you are unable to work as a result of an accident or injury. In our continued effort to support Disability Awareness Month, we will focus on the key elements that you should know about your employer-sponsored long-term disability plan.

  1. Eligibility – Under plan rules, employees filing for disability might only qualify for coverage under certain terms, such as the requirement to work for the employer for a certain amount of time before coverage starts or the retirement of full-time employment.
  2. Definition of disability – It is important to determine how a policy defines disability. Some policies will pay benefits if you are unable to perform the duties of your own occupation, while others pay only if you are unable to engage in any gainful employment. It is often common to see the following language used in employer plans “the total and continuous inability of the employee to engage in any and every gainful occupation for which he or she is qualified for by reason of training, education, or experience.”
  3. Premium payment – If your employer pays the premiums for your disability policy, any benefits you receive will be subject to ordinary federal and state income taxes. However, if you pay for your disability coverage with after-tax dollars, the disability payments you receive each month are not considered taxable income.
  4. Benefit amount – A policy will generally pay benefits equal to 40-60% of pre-disability salary and most often do not include additional commissions and bonus income. A maximum monthly benefit is also established by the employer and is usually in the range of $5,000 to $10,000.
  5. Elimination period – The elimination period serves the same purpose as a deductible for health insurance. It is expressed as a specified number of days, such as 90, at the start of a disability. During the elimination period, no benefits are paid from the insurance policy. This is an important element in planning, as an individual will need to supplement their income during this period.
  6. Benefit period – This is the amount of time that benefits will be paid and can be anywhere from 12 months to full retirement age and will end if you are able to resume work. There is no typical benefit period to provide as an example, as they often are illustrated on a graded scale set forth by each employer.
  7. Portability – It is rare to find an employer-sponsored policy that can transfer with you should a change of employment occur. If maintaining coverage is a vital piece of your overall plan, individually owned policies can be purchased outside of an employer’s plan.

Insurance is complicated and getting it right is essential. It is important to take time to read and understand what is covered, for how long, and under what circumstances. This is an important aspect of overall financial planning. We encourage you to review your coverage on an annual basis. Questions? We’re here to help.

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