Employer-Sponsored Long-Term Disability Insurance

Article excerpt

Employer-sponsored long-term disability insurance

Long-term disability insurance provides income to workers whose earnings are interrupted by lengthy periods of disability. Benefits usually are payable until retirement, a specific age, or recovery from disability. However, benefits do not usually begin until short-term disability payments (sick leave or sickness and accident insurance) cease. Long-term disability plans thus provide a bridge between short-term disability benefits and retirement income.

Long-term disability insurance is not the only source of extended income replacement for disabled workers. State workers' compensation programs provide benefits to workers disabled through occupational injuries or sicknesses. Similarly, most employees are covered by the disability insurance portion of Social Security, which provides income to workers and their families for both occupational and nonoccupational disabilities.

In addition, private pension plans commonly provide for disability retirement benefits.1 Under plans with immediate disability benefits, payments to eligible workers start at the time the injury or sickness occurs. Plans with deferred benefits, however, postpone payments until the normal or early retirement age specified in the pension plan. Under deferred plans, employees who qualify for long-term disability payments usually continue to earn credits for service in their pension plans until the formal retirement date is reached. At that time, the disability payments cease and pension payments begin.

Long-term disability plans are almost always coordinated with these other sources of long-term disability income. This article describes the provisions of the plans and how coordination is achieved.

Development of the plans

In the 1950's, long-term disability benefits were generally available only to middle and upper income employees on salary. Also, restrictive length-of-service eligibility requirements, such as 5 years, were imposed.2 But in the 1960's and 1970's, a variety of factors led to extending the benefits to lower income and hourly wage workers.

Growing concern about the adequacy of State workers' compensation benefits prompted unions to seek additional protection through collective bargaining. The extension of Social Security to include disability benefits in 1956 was another factor influencing management to cover hourly wage earners. Adoption of Social Security benefits heightened interest in the disability plans and reduced employers' costs for this benefit when provision was made for offsetting government payments.3

In 1984, more than 22 million persons had long-term disability income protection. Of this number, 17.3 million were under group insurance policies and 5.5 million had individual policies.4 This compares with a total of 3 million persons covered in 1963, and demonstrates the rapid spread of such benefits in the last 20 years. Disability insurance policies are generally purchased from life insurance companies, but some are written by property and liability insurance companies or by health insurers. These plans, however, are rarely self-insured by the employers.

Employee benefits survey

This analysis is based on information from the 1985 Bureau of Labor Statistics' survey of employee benefit plans in medium and large establishments.5 Data on 522 long-term disability plans were tabulated separately for full-time employees in three occupational groups: professional-administrative, technical-clerical, and production. The first two groups are jointly labelled white-collar workers, in contrast with production or blue-collar workers.

According to the survey, long-term disability insurance, wholly or partially financed by the employer, was available to 48 percent of the full-time workers. This was a 20-percent increase since 1980, when the survey became fully operational. …