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Employer-Sponsored Disability Employer-Sponsored Disability Insurance and Life Insurance Insurance and Life Insurance

McGraw-Hill/Irwin Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 6Chapter 6

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LEARNING OBJECTIVES

• Disability and life insurance concepts

• Origins of disability and life insurance programs

• Short-term and long-term disability

• Types of life insurance

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DISABILITY INSURANCE

• Short - Term– Last Less Than 6 Months– Disability is an Inability to Perform Any of

Occupation’s Duties

• Long - Term– Lasts Over 6 Months– Disability is an Inability to Perform Work

Qualified For (Training, Education, Experience)

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2006 COVERAGE

• 69% of Private - Sector Employees– 39% Have Short - Term– 30% Have Long - Term

• Full - Time Employees – 46% Have Short - Term – 38% Have Long - Term

• Part - Time Employees – 13% Have Short - Term

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SHORT - TERM DISABILITY

• Pays 50% - 67% of Pre-Tax Salary

• Benefits for 6 Months • Waiting Periods

– Preeligibility – Elimination

• Exclusion Provisions– Self - Inflicted Wounds– Chemical Dependency

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LONG - TERM DISABILITY

• 50% - 70% of Pre - Tax Salary • 6 - 12 Months Waiting Period• Activated after Short - Term Benefits

Expires• Waiting Periods

– Preeligibility– Elimination

• Preexisting Conditions Clause• Exclusion Clause

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FUNDING DISABILITY INSURANCE

• Independent insurance companies

• Partial self-funding

• Total self-funding

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TAX OBLIGATIONS

• IRS Code for Accident & Health Insurance Plans

• Employers Deduct as Business Expense

• FICA & FUTA for First 6 Months

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EMPLOYER FICA & FUTA EXEMPTIONS

• Income after 6 (FICA only)

• Workers’ Compensation Payments

• Disability Benefits after Worker -Initiated Termination

• Employee’s Eligible for Social Security Disability Benefits

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RELEVANT LAWS

• Age Discrimination in Employment Act of 1967

• Americans with Disabilities Act of 1990

• Employee Retirement Income Security Act of 1974

• Workers’ Compensation and Social Security Regulations

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ADEA

• Provides safe harbor for employees with disabilities occurring below age 60

• Older Workers Benefit Protection Act (1990)

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ADA

• Prohibits discriminatory employment practices against individuals with disabilities

• EEOA enforces ADA and oversees violation criteria

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ERISA

• Regulates Benefits Practices

• Disability Insurance

• Health Insurance

• Life Insurance

• Pensions

• Titles I, II, III Apply to Non – Pension Benefits

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STATE WORKERS’ COMPENSATION AND SOCIAL SECURITY DISABILITY REGULATIONS

• Employees may receive long-term disability benefits from public as well as company sponsored disability programs

• Companies and insurance companies may include an offset provision to reduce benefits from workers’ compensation

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TWO INTEGRATION APPROACHES

• Full Integration– Company Payments Reduced by Public

Disability Amounts

• Dual - Percentage– For Employees Without Public Benefits

– For Employees With Public Benefits

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LIFE INSURANCE

• Coverage – 62% of Full - Time Employees

– 11% of Part - Time Employees

• Costs– Manufacturing Industry $120 Per– Non - Manufacturing $83.20 Per

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LIFE INSURANCE

• Term– Most Company-Sponsored Plans

– Specific Termination Date– Payments Only for Death

• Whole– Policy Always Pays Off

– More Expensive

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GROUP TERM LIFE INSURANCE

• Contributory– Employee Pays All or Part of Premium

• Noncontributory– Employer Pays Entire Premium– Employers Gets Higher Tax Benefits

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TAX TREATMENT GROUP LIFE INSURANCE

• Employer can Deduct Premium as a Business Expense

• Employer CANNOT be Beneficiary

• Employee Pays Taxes on Coverage Above $50,000

• Subject to IRC Section 79

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UNIVERSAL LIFE INSURANCE

• Combines features of term life insurance and whole life insurance

• Created to provide more flexibility by allowing the policy owner to shift money between insurance and savings components of the policy

• Insurance company initially breaks down premium into insurance and savings

• Policy owner makes adjustments to the amounts directed at each

• Permits the cash value of investment to grow at a variable rate tied to market

• Leads to changes in premium, benefits, and payment schedules