Commentary
The concept of total and permanent disability being an insurable risk originated in Great Britain by the Friendly Societies in the mid-eighteen hundreds. Disability benefits as an integral part of life insurance is traceable to Germany in the late seventeen-hundreds; the coverage spread into the United States through Canada. Travelers Insurance Company is known to have offered both waiver of premium and installment income benefits to permanent life insurance policies as early as 1906.
Early group contracts (circa 1915) had available total and permanent installment benefits as well as the waiver of premium benefit.
Group Long Term Disability (LTD) coverage, as we now find it, gained impetus in the late nineteen-eighties where more than a few insurers aggressively sought to write this coverage in large volume.
Privacy
Issues
HIPAA and Gram-Leach-Bliley laws impact on LTD as well as medical. Also, existing state privacy laws, to the extent that they are more strict than HIPAA also apply.
The EEOC is reporting a sharp increase in privacy-related complaints in recent months.
Privacy rules are equally applied to information regarding either (a) worker health status or (b) status of a disability claim.
Small
Employers and LTD
Many employers in arranging their financial planning affairs overlook LTD. This is unfortunate because the disability of the key person (sole proprietor or a critical professional) can have a disastrous impact or the business. Two types of disability forms are found in the market place.
This benefit covers the ongoing business overhead expense which continues after the disability of the key person.
This benefit replaces the lost income of the ley person.
As with the death peril, the disability peril should be the subject of buy-sell arrangements where they are very often appropriate.
DOL
Positions
In its Adv. Opn. 5-03, the DOL held that short term disability was a reasonable benefit to be self-funded. Left unanswered, what would be their view on self-funded LTD? The DOL stressed that the short term disability must be safe and sound. The DOL noted the opportunity for short term disability benefits to encourage absenteeism.
Disadvantages
of Self-funded LTD
The primary disadvantage of LTD is that the upside risk is greater than many employers wish to assume, stop-loss notwithstanding. The uncertainty of available administrative services (typically TPA-provided) and the volatility of the stop-loss market to some employees are sobering thoughts to some employers.
Then too, the additional efforts and expense in funding and reserving the benefits which should be funded with a trust may be viewed by some employers as a negative.
Advantages
of Self-Funded LTD
The usual advantages found with medical are applicable also with LTD:
In addition, the self-funded LTD plan, particularly if governed by a trust, will have an enormously improved chance of prevailing in claims litigation. This is because the conflicted-interest difficulty with insurer-involved funding (be it fully insured or ASO-administered).
Funding
and Federal Tax Issues
The recommended funding is as follows:
2. Stop-loss should be purchased with the trust being the applicant-owner-payer-beneficiary.
3. The employer may claim tax deductions in the amount of lesser of (a) or (b) where:
a. Amount contributed to the trust.
b. Amount equal to the following:
Beginning reserve plus
Benefits paid less
Ending reserve
4. Only LTD benefits will be funded through the designated trust
Reserves
The reserves are actuarially-determined and are in these three parts.
· Claims of expected long term duration
· Claims of expected short term duration
· Claims in litigation.
No reserves of an active-life nature are to be recognized. Nor are any reserves recognized which amortize post-retirement benefits (as with death or medical benefits) over the participant’s working lifetime.
The reserves need not be funded. That is, the liability of, say $1,000,000 may be covered by assets which appear as follows on the balance of the trust.
Assets
Cash $400,000
Present value of the future
Employer Contributions $600,000
Total $1,000.00
Stop-Loss
Only the specific form of stop-loss should be provided and it should be on a quota-share basics. Suggested actuarially-reasonable limits are as follows:
Number of Plan Monthly Disability Income
Participants Assumed by the Trust
50-99 $200
100-199 300
200-299 500
300-499 1000
500-999 2500
1000-over 5000
The aggregate form of stop-loss should not be provided to the trust.
Qualified v Non-Qualified Trust
The great majority of self-funded LTD plans should use a non-qualified trust because the primary advantage of the qualified trust being tax-exempt investment gains fails to offset the primary disadvantage of the qualified trust which is the added time, expense, regulatory burdens, etc.
The writer’s recommended breakpoint between such trust is as follows:
Expected Trust Recommended
Assets Trust______
Up to $4,000.000 Non-qualified
Over $4,000.000 Qualified
Statistics of Interest
The Census Bureau tells that we have a 20% chance of being disabled sometime during our working lifetime. Also, that approximately 152 million people between 21 and 64 have some form of serious disability.
The American Council of Life Insurance has reported that the probability of disability is six-times that of dying during the time period 35-65.
The causes of disability are reportedly as follows:
Cancer 13%
Complications of pregnancy 12
Back injuries 11
Heart 9
Depression 5
The Source of these statistics is UnumProvident.
The A.M. Best Company tells us that the major LTD insurers in order by market dominance are these:
Paul Revere
Provident Life and Accident
Northwestern Mutual
Mass Mutual
Guardian Life
Equitable Life
New York Life
Combined Insurance
Unum Life
Principal Life
The American Council of Life Insurers and the Consumer Federations of America inform us that most workers are not covered for disability and that of those who have any coverage (41%) most deem it to be inadequate.
Group LTD is offered by employers as graded by size as follows:
Number of Employees Percent Offering LTD
Over 5,000 98%
500 to 5,000 85
100 to 500 72
Below 100 33
The Society of Actuaries have determined that the sex bias as regards disability is as follows:
Female
Disability Costs
Age Relative
Male Costs
Younger + 15
Older - 5%
Composite +10%
The Integrated Benefits Institute have studied return-to-work programs and claim savings therefrom of 40% for injuries and 23% for other causes of disability. While many (53%) of employers had such programs for workers’ compensation a much smaller percent (37%) had such programs for benefit related LTD.
Extent of LTD Market
|
|
Number
of LTD Master Contracts By Funding Method |
|||||
|
Insurer |
Fully
Insured |
|
ASO |
|
||
|
Aetna |
|
669 |
|
|
46 |
|
|
CIGNA |
|
2069 |
|
|
104 |
|
|
CNA |
|
7929 |
|
|
26 |
|
|
Great-West |
|
151 |
|
|
0 |
|
|
Guardian |
|
15874 |
|
|
0 |
|
|
Hartford |
|
128000 |
|
|
64 |
|
|
Jefferson-Pilot |
|
9431 |
|
|
0 |
|
|
Metropolitan |
|
7645 |
|
|
73 |
|
|
Principal |
|
9450 |
|
|
4 |
|
|
Prudential |
|
5773 |
|
|
21 |
|
|
Reliastar |
|
221 |
|
|
2 |
|
|
Standard |
|
19072 |
|
|
0 |
|
|
Union Central |
|
860 |
|
|
0 |
|
|
United Wisconsin |
|
818 |
|
|
0 |
|
|
UnumProvident |
|
69917 |
|
|
0 |
|
|
Total |
|
162,879 |
|
|
340 |
|
*As of December 31, 2002