One of the most overlooked and undervalued employee benefits is long-term disability insurance. Often, even if the employer offers to cover the low premium, employees don't sign up.
They think they won't become disabled or need income replacement, despite some startling statistics: that about 25% of 20-year-olds will become disabled, even if temporarily, before they reach retirement.
Long-term disability coverage kicks in after short-term disability payments run out - usually between three to six months after the debilitating non-industrial injury or illness that caused them to be unable to work.
Long-term disability insurance pays up to 60% of a worker's salary until they can return to work. In some cases, it will pay an employee up to retirement.
Despite the relatively low take-up, there are ways you can sell your staff on this important benefit that can save them from financial ruin should they have an accident or illness that prevents them from working for an extended period of time.
Overall, 41% of employers offer long-term-disability insurance, according to LIMRA, an association of financial services and insurance companies, though the proportion of larger employers who offer it is generally much higher.
Compared with health insurance, premiums cost a pittance - $260 annually in 2017, on average for group plans, LIMRA says. Many employers pick up the whole tab or charge workers a small amount.
Tax-free payouts if you are disabled - For the most part, premiums for long-term disability insurance are paid with pre-tax earnings through a payroll deduction by the employer. However, if the employee would like higher post-injury benefits, the employer can set up an arrangement where the individual pays the premium with after-tax dollars.
That way, if they have to collect on their benefits, they won't be taxed as they would be otherwise. The employer can boost the employee's pay by the same amount as the premium, so it is still like receiving an employer-paid benefit.
Allow workers to pay with tax-free dollars - The other option is to sell them on the benefits of paying for the premiums with earnings before they are taxed. Or, since the premiums are so low, for most employers it's really not a big stretch to pay their workers' long-term disability insurance premiums.
But in this scenario, if they do file a claim, the benefits are taxed, which can substantially reduce the payout for them at a time they likely need the extra money.
Premiums are usually paid through a Section 125 cafeteria plan.
Pay the premium for them - About 60% of employers that offer long-term disability insurance pay the premium themselves. But, like the option of your employees paying through their cafeteria plan, they will be taxed on any benefits that are paid out later.
Included in this option is that the employer and employee split the premium in some way.
Benefits to employees
The best way to promote long-term disability insurance to your staff is to let them know it's a lifeline for them should they have a catastrophic injury. We have literature that you can share with your staff that provides real-life examples of what can happen if someone doesn't have long-term disability coverage.
After that, you can discuss the different options in terms of taxation that are available to them and help them figure out which plan might be right for them. At least one of the options should appeal to each of your staff.
Most disability insurers have a calculator to help your employees figure out how much coverage will cost them depending on what you offer and how much they would receive in payouts should have they have to file a claim. It may show the difference in take-home pay if a worker is using disability benefits and paying income tax.
Auto-enrollment can also make a big difference. Employers that auto-enroll employees in voluntary long-term-disability plans may get 75% of employees to participate, compared with 30% for employers that leave it completely up to workers, according to disability insurer Unum US.
Give us a call today if you have any questions or would like to discuss the benefits in more detail.