Disability Insurance: The Overlooked Employee Benefit

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Does your pay stub include the cryptic three-letter code LTD with a tiny dollar amount that’s deducted each pay period? It stands for long-term disability insurance, and it pays to have it to provide for your family when you can’t work because of an injury or an illness like cancer. But many employees go without it. In fact, despite the fact that more employers are offering long-term disability insurance as an employee benefit, the number of employees insured is dropping.

That’s the troubling trend that the Council For Disability Awareness, a group representing 19 member insurance companies, found in its latest annual review of claims data for 2013. More than 213,000 employers offer long-term disability insurance through those companies, a slight increase for the second year in a row, after declines from 2009 to 2011. Yet the number of insured employees declined roughly 1.5% to 32.1 million last year (in 2009, 34 million employees had coverage).

There are a couple of reasons for the changing disability landscape, according to Barry Lundquist, president of the Council. One factor is that employers are focused on compliance with the new Affordable Care Act’s health insurance provisions—so employers and agents/brokers are saying they’ll deal with other benefits like disability insurance later.

Another factor is that when employers are adding disability insurance as a benefit today, it’s more likely that they add it as a voluntary benefit. That means the employee pays the full cost. Historically, the employer has paid the full cost, or at least for coverage up to a certain level. With employer-paid plans, employees are automatically enrolled. Sometimes you have the decision whether to make salary deferrals to increase your coverage. But with voluntary plans, enrollment hovers around 40%, Lundquist says.

Perhaps in part because of the improving economy, the number of individuals receiving long-term disability payments declined for the second year in a row, after four straight years of increases from 2008 through 2011. Yet total claim payments increased by 1.6% to $9.8 billion in 2013, the fourth year of increasing payments.

If you have disability insurance, you need to understand what you do have and determine if it’s enough. A typical benefit is 60% of your salary up to a $5,000 maximum monthly payout. Check if there’s an option to buy more coverage through your employer (the extra premiums really are cheap; I pay $75 a year). If you don’t have employer coverage or need more coverage than your employer plan offers, consider buying a personal policy on your own (MetLife MET +0.69%, Unum, Mass Mutual and Ameritus all sell personal policies.)

Here are some facts about disability insurance from the 2013 claims review to keep in mind while you’re reviewing your coverage.

  • Women take note. Women make up the majority of new claims. 56% of new long-term disability claims approved during 2013 by the member companies were for women; 44% were for men.
  • It’s for all ages. While claims by those age 50 and older, driven by claims by those age 60 and older, have been consistently increasing as a percentage of total claims over the past five years, younger workers face disabilities and benefit from long-term disability insurance. Four in ten new claims were made by those in their 40s or younger.
  • Injuries aren’t the leading cause of disability claims. Musculoskeletal system and connective tissue disorders like arthritis and sciatica are the leading cause of new disability claims, coming in at 29% of new claims. Cancer is second at 15% of new claims. Injuries and poisoning combined represent 10% of new claims.
  • Social Security disability only goes so far. Almost three-quarters of workers who get private disability insurance also get Social Security disability. Social Security disability payment amounts are very low—in the $700 a month range for younger workers. “That doesn’t go very far,” notes Lundquist. Also, it’s hard to qualify for and can take a year or longer to get approved for benefits.
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