Group Short and Long Term Disability Insurance Today we are going to discuss two of the most common methods for an employer to provide disability insurance on their employees . . . Group short and long-term disability. We are going to focus on the need, but also look at variations available that might help you help your new and existing clients.

Course Objectives To provide an understanding of group disability insurance and the disability market with particular emphasis on . . . Sick-Leave Short-Term Disability Plans Long-Term Disability Plans Voluntary/Worksite Plan Here is what we will focus on today.

Top seven chronic conditions causing work limitations This list demonstrates the top disabilities causing work absences. This list has changed dramatically over the last decade, with mental illness showing the most dramatic growth. Society of HR Mgt, WorkplaceVisions; World Jea;tj Prgamozatopm 2001

Distribution of Coverage Employer pays all 64% 63.7% ER and EE Currently, across all sizes of employer groups, the percentages look like this. 15% 16.4% Employee pays all 21.3% 19.5% JHA Disability Fact Book 2003/2004 Edition

The Current Market Position In a survey of business with 1-99 employees, 52% of the firms offered LTD and 48% offered STD Larger groups (500+) are more likely to offer disability benefits vs smaller employers (<100 ees) LTD: 90% vs 77% STD: 84% vs 62% Manufacturing firms are more likely to offer STD (70% vs 55%) then LTD (61% vs 71%) then non-manufacturing firms A huge market in the smaller size groups, 2-9 and 10-99 exists. Also, note that if a company is to provide one or the other, most will provide some form of short-term disability. JHA Disability Fact Book, 2003/2004 Edition

Self-Funded or Sick-Pay Plans Typically self-funded by the employer Often tied to tenure Usually capped at a certain number of work-days, ie., 10 days Almost always ‘total only’ Needs to meet employers needs and coordinate with other plans Most employers have some form of sick-pay program. These are especially prevalent in the blue and gray-collar marketplace. Most plans have limits on the accumulation and are self-administered by the employer.

Short-Term Disability (STD) Plans Common Plan Design Parameters Benefit: 60% or 662/3 % to $500 0/7/13 or 0/7/26 Non-occupation Family integration Common plan designs

Long-Term Disability (LTD) Plans Common Plan Design Parameters Benefit: 60% to $6,000 90 or 180 day elimination period 2 year own occupation Zero day residual with partial Family integration 2 year mental and nervous Again, common plan designs. You will see higher maximum caps, especially in physician and attorney groups. Additionally, larger employers will often have higher maximums. A common rider is to have a longer “own occupation” definition on a class basis, usually confined to white-collar and/or professionals.

Own/Any Occupation Own occupation typically 2,3,5 years or own occ to age 65 Unable to perform all the material duties of own occupation on a full-time basis for selected # of years Any occupation begins after own occupation period ends Unable to perform the duties of own or any other occupation for which person is fitted by training, education, experience, age and physical and mental capacity “Own Occupation” provides more protection for the protected class then an “any occupation” definition. Typically found in white collar and executive groups or on a ‘carve out’ basis, this definition provides the highly skilled employee the ability to protect his or her occupation, but will offset if and when they work on a partial basis or in another occupation. Often the “own occ” is perceived to lessen the pressure to take the first job opportunity available and attempt to return to their prior occupation.

Insurable Income Options Basic Monthly Earnings With or without commissions and/or bonuses 12 or 24 month average W-2 Earnings S-Corporation Earnings Partnership Earnings Teacher’s Earnings The issue of ‘earned income’ and ‘covered income’ are very important, especially in the group contract. Anyone with variable compensation, such as bonus or commissions, needs to know if that income is covered and how the calculation is performed. Additionally, the form of income and the form of business entity can effect the taxable status of the benefit.

Other Income Benefits Workers’ Compensation Social Security Other Compulsory Group Disability Government Retirement Disability Employer’s Retirement Disability Unemployment

Common Income Offsets Social Security Primary only Primary and family Social Security is probably the most commonly thought of offset for group long-term disability. The two available definitions are ‘primary’ and ‘primary and family’ offsets. This is how they work.

Primary Only LTD Benefit $4,600

Primary and Family LTD Benefit $4,250

Income Not Typically Offset 401k plans and 403B plans VA benefits Profit sharing not funded by employer Thrift plans IRAs Tax sheltered annuities SOPs – stock ownership plans Retirement benefits No-fault auto insurance While Social Security or earned income while on partial or residual claim can offset the benefits payable, the following list will seldom reduce the benefits payable from group contracts.

Worksite Payroll Group Simplified Issue Individual Optional Riders Guarantee Issue Participation requirements Over the last decade, voluntary and payroll products, sold on a voluntary basis in the workplace have exploded. Both products have advantages. The real point of the slide is to ensure you are looking at each of your employer groups and are aware that various options to supplement the employer plans exist. The need for the employee is great and ever increasing. Voluntary plans are likely to continue to grow due to the higher medical premiums and pressure on employers to limit the growth in the benefits costs.

Payroll Typically include individual, payroll deducted products Usually ‘simplified’ issue with limited medical underwriting Portable Often with limited plan design, ie., benefit duration Often sold on an ‘indemnity basis’ versus as a percentage of one’s income ($500 per month)

Group Voluntary Typically a group chassis, with age-brackets Premium is calculated by taking the rate (either age-bracket or composite) times the employee’s covered monthly income 60 % of covered earnings Typically Guarantee Issue during the ‘open enrollment’ and requiring Evidence if a late enrollee Usually require some minimum participation level Limited portability

Core-Buy Up Increasingly popular option Employer purchases a base plan and allows the employee to ‘buy-up’ on a voluntary, payroll deduction mode ‘Buy-ups’ can include benefit duration, benefit amount, elimination period Can help stabilize the employees cost and allows the employee to purchase on a group basis with price breaks and guarantee issue

Core-Buy Up Sales Example Benefit Plan Design Core Plan CorePLUS Monthly Earnings $5,000 $5,000 After-tax income $3,500 $3,500 Benefit Plan 50% to $5k 60% to $6k Gross benefit $2,500 $3,000 Taxable benefit $2,500 $1,500 ($3kx.65) Benefit not taxed $0 $1,050 Taxes (fed+state) 30% 30% Total Tax $720(2,500 x .30) $585(1,950 x .30) Net (after-tax) benefit $1,750(2,500-750) $2,415(3,000-585) This example demonstrates the positive effect of the buy-up option to the employee and the marked increase in spendable dollars to the employee.

Core-Buy Up Options Benefit Duration – The employer purchases a plan with benefits payable for 2 years or 5 years and the employee purchases protection to age 65 Benefit Amount – The employer provides a limited benefit amount, ie., $1500/month and the employee purchases a higher maximum, ie., $5000/month using after-tax dollars thus creating a federal income-tax free benefit for the higher amount Elimination Period – Purchasing a lesser elimination period versus the employer provided plan, ie, buy down the e.p. from 180 days to 90 days Options available to the employees in a Buy-up plan include the following and can allow the employee a great deal of personal choice while allowing the employer to provide a base plan which will provide for all the employees. Personal choice can be perceived as a positive, but provide some rate relief from ever increasing costs associated with employer provided benefits.

Final Thoughts Group disability insurance is more necessary now then ever Most employees are living close to financial hardship and do not have the personal savings to withstand a work absence More options for providing disability plans to your employers and their employees exist then just a few years ago Your employer groups are looking for advice and counsel on plan design

Questions?