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Employee Benefits

Have You Checked the Fine Print in Your Long-Term Disability Contract?

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Have You Checked the Fine Print in Your Long-Term Disability Contract--.jpgIllnesses or injuries can leave people unable to work for long periods of time. While they’re unable to work, they still have expenses that need to be paid. Long-term disability insurance can help employees who find themselves in this situation. This insurance pays a percentage of their pre-disability salaries until they get better, retire, or otherwise become ineligible for continued payments.

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For employees, this type of insurance is very valuable. The goal of an employer is to ensure employees are focused on delivering value at their jobs every day while the employer worries about the catastrophic events that could occur and that the right insurance strategy could help them prepare for.  Long-term disability insurance is one type of insurance that can provide employees peace of mind and personal security. This offering demonstrates that the company values them. It is a potential retention strategy.

However, long-term disability contracts can have fine print that can catch both employees and employers off guard. Have you read the fine print in your contract? Looking closely at your contract can help ensure employees receive the right amount and you don’t get caught with unhappy employees.

All Source Maximum Clauses

In the fine print of your long-term disability contract, you’ll probably see an all source maximum clause. This clause accounts for employees’ income from all sources and limits their replacement income to a percentage of their pre-disability income. The all source threshold is commonly 85 percent, according to Benefits Canada.

Employees’ income sources can vary, and they’re all considered when calculating long-term disability benefits. Employees could receive income from CPP disability benefits, workers’ compensation, or auto insurance. They could also receive income from an employer or from self-employment.

The reason for this clause is to avoid disincentivizing employees from returning to work. If employees receive as much or more income from the disability benefit than they did when they were at work, some could decide to not return to work. With this clause, employees need to recover and return to work to keep earning their pre-disability income.

Erosion of Long-Term Disability Insurance

In some cases, employees can end up with less coverage than they think they have. This can occur if the plan is non-taxable and uses a flat percentage to calculate premiums. For example, your plan could provide two-thirds (66.67 percent) of pre-disability earnings to disabled employees. For higher-income employees who pay a greater portion of income tax, their maximum coverage could be less than their benefit amount. Employees who think they have $5,000 per month of coverage could discover they actually are only eligible for $4,500 because of this erosion.

Hopefully, none of your employees will ever need to use your long-term disability insurance, but if they do, you don’t want them to be disappointed with their earnings. This unexpected erosion of benefits could make an already difficult time even harder.

Reducing Erosion with Plan Design

Fortunately, it’s not hard to fix this problem. Instead of using a flat percentage to calculate premiums, you can switch to a graded schedule. This schedule takes employees’ net and gross incomes, as well as other sources of income, into account. By considering this additional information, you can provide more accurate benefit levels to your employees. They’ll know how much disability income they’re really entitled to, so they won’t feel like they’re paying for a higher level of coverage than they can get.

Long-term disability contracts can be confusing, especially for business owners who don’t have a background in insurance. Make sure you read the fine print of your contract, and consult with a professional if you don’t quite understand a clause.

If you want to learn more about long-term disability insurance, don’t hesitate to talk to a benefits consultant. These experts can give you the information you need to understand your options and to make decisions that power your company’s growth.

Engage a total compensation partner to ensure you have reviewed your overall strategy, determined what was most meaningful, and ensure both you and your employees are protected from catastrophic issues. A partner with deep insider knowledge can help you navigate the fine print when you may not know what to look for or what your contract may mean when a catastrophic issue occurs.

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Darwyne Lang

Darwyne Lang

Darwyne is the president and CEO of Apri Insurance Services Inc. Having worked in the industry for over 30 years, he lives the benefits business every day. He is a Chartered Life Underwriter (CLU). He understand the needs, costs, misconceptions, and effects on brand and culture, and the importance of benefits for employees. No matter what he’s doing, whether for work or pleasure, Darwyne competes at a very high level. He loves to lead and innovate in everything he does.

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