Questions to Ask About Your Long-term Disability Insurance

Some disabilities occur suddenly and cause an obvious problem: A business owner is hit by a truck or suffers a disabling stroke. Other disabilities evolve over time: A diagnosis of Parkinson’s disease may allow a business owner to keep working for years, but eventually the disease forces an early retirement.   Any disability lasting longer than 180 days is considered a long term disability.

Too often, business owners and their employees assume they have adequate long term disability insurance coverage until a scenario like one of these occurs. Then they discover for the first time that there are gaps in their coverage, according to attorneys Woody Connette and Natalie Potter. The pair specialize in disability law with the firm of Essex Richards, Charlotte.

Connette and Potter recommend asking for the following features in a group long-term disability policy to ensure the best coverage for the business owner and employees alike:

* Appropriate coverage, taking into account the type of business and jobs.  Most plans calculate the benefit amount based upon the employee's earnings. The typical plan will pay 60 percent of the employee's "Base Monthly Earnings." This sounds sizable – until one considers how the policy defines "Base Monthly Earnings." It’s usually defined as the employee's current base salary, but does not include commissions, bonuses, overtime pay, or any other extra compensation, according to Connette.

That limited definition can present a serious problem for executives, sales employees, and others whose compensation is based primarily upon performance. If an employee has a relatively low base salary but routinely earns large commissions or performance bonuses, the available disability benefit can end up being a small fraction of his or her pre-disability earnings.  Consider purchasing insurance which includes these additional earnings in the base pay calculation if this applies to your income or to that of your employees.

* “Own occupation” versus “any occupation.” A typical policy will pay disability benefits for about two years as long as the employee is disabled from his or her own occupation. After that, the employee must show total disability from any occupation. “That standard is much more difficult to establish,” Potter says.

Physicians, attorneys and other professionals often will have disability policies that pay benefits as long as they remain disabled from their own occupation, which would mean the specific practice or specialty area they were engaged in at the time of their disability. These policies will continue to pay benefits, even if the claimant goes to work in some other occupation, as long as they remained disabled from their own occupation. Of course, these types of policies are more expensive.

* The option to “buy up” for additional coverage.  It’s common for a group policy to pay about 60 percent of pre-disability earnings. Some policies allow employees to purchase additional coverage, up to as much as 70 percent, through payroll deductions.  Another possible addition is called supplemental disability insurance coverage. It also raises the amount of the payout after a disability occurs.  Including options to purchase additional coverage based upon an employee’s individual needs can be an added benefit for your workforce.

Overall, Connette and Potter have found that the cheapest policy is rarely the best policy. “The standard for proving disability under some policies is so rigorous that it’s extremely difficult to obtain benefits, even with the most serious disabilities,” Connette says. As with other big purchases, it pays to shop around and compare coverage to make certain that you are getting the best plan for the business, its owners, and its valued employees.

Next month, we’ll look at what to keep in mind if you or your employees need to go on disability.