January 29, 2004   Copyright © 2004, Greenwich Financial Management Inc., a registered investment advisor.  Securities offered exclusively through Purshe Kaplan Sterling Investments of Albany, NY, a NASD member firm.

Demystifying Insurance, Part 8:

Group Disability Contracts

            If you are an employee of a company with a decent benefits package, you may have some disability coverage provided to you free, and you might have the option to purchase additional coverage.

            Disability insurance is the kind of topic people avoid thinking about until they need it.  But then it's too late.  It's wise to do some homework to protect yourself and your family, particularly if you do not have enough wealth to cope without employment income for long periods.

            Group disability policies are not normally individually underwritten.  This means that you won't fill out a health questionnaire or be subject to a medical examination and lab tests to get it.   The insurer instead relies on an average estimate of risk based on the group characteristics and certain objective features of each individual, such as age and sex. 

            There are two kinds of group disability: short-term and long-term.  Short-term generally covers the first thirteen to twenty-six weeks of disability, while long-term covers a period afterward, but normally no longer than to age sixty-five.  Because today's long-term disability policies almost never cover you beyond retirement age, it's necessary to plan for retirement separately, including the likely need to make ongoing contributions to a retirement plan out of disability income.

            New York State requires all employers to provide short-term disability coverage after thirty days of employment.  Cash benefits are one half of your average paycheck or $170, whichever is lower.  New Jersey has a State Short-Term Disability Program.  The State of Connecticut does not require employers to provide this limited protection.

            A good disability contract covers your being unable to work in your existing occupation.  A weak contract covers only your being unable to work in any occupation.  Notably, many group contracts limit the "own occupation" definition to the first two years of disability benefits-after that, good luck!  You have a right to ask your human resources manager to give you a copy of your group contract for review.

            You should also find out which company offers your group disability plan and how strong their credit rating is.  (See the article on assessing the credit of insurance companies at our Website, http://www.greenwichfinancial.com/.)  Leading short-term disability insurers, by market share, include UnumProvident, Hartford, Met Life and Prudential.  Leading providers of long-term disability insurance include Unum-Provident, Hartford, Cigna, Met Life and Prudential.  Be sure to check with your agent on claims paying reputation; UnumProvident's reliability was seriously questioned in a recent (11/17/2002) CBS "60 Minutes" feature. 

            Sometimes professional associations offer group disability insurance.   If the premiums seem strikingly low, there is usually a catch, typically that the benefits decrease with age.  It also is worthwhile to find out if the carrier has the option to drop the association's coverage. 

            My firm often works with companies to provide executives with individual portable disability policies.  These policies are available at group pricing, at perhaps a 40% discount to what the executives could obtain on their own. 

            Employers are able to deduct group disability premium expenses, but any benefits received are taxable to the beneficiary.  If you purchase optional disability insurance at work, you may be given the option to pay for it using pre-tax dollars through a Flex Spending Account.  The disadvantage is that any disability benefits stemming from these pre-tax contributions also would be taxable.  On the other hand, individuals often fall into a lower tax bracket while disabled.  Benefits from an individual disability policy paid for with post-tax dollars are not taxable.

            Under federal tax law, a business cannot deduct wages paid to a disabled employee.  Many small businesses fail to anticipate or plan for this problem.  A good workaround is to establish a qualified sick plan (QSSP) under Section 105 of the Internal Revenue Code.  QSSP's, although qualified under ERISA like retirement plans, are allowed to favor certain employees or groups over others without jeopardizing the plan.  Because QSSP's can engender large liabilities, both objectively and under GAAP accounting, they are normally fully funded by group disability insurance.  If a QSSP covers more than 100 employees, it must be filed with the Department of Labor.

Next week:  Long Term Care