Features of group disability insurance

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group disability insurance

Besides government disability insurance programs, employees may also have coverage through their employers. Disability insurance forms the basis of many benefits plans offered by employers. It’s a valued part of a comprehensive benefits package that often includes life insurance, extended health care and dental coverage. Group disability insurance provides short-term coverage for 4.6 million Canadians and long-term coverage for over 10 million Canadians (1).

Like other benefits of group insurance, disability insurance can be customized by the employer to its liking. Things that can be changed include benefit amount, maximum benefit, length of waiting period, maximum benefit period and more. Short-term disability benefits can be customized independent of long-term benefits. Finding the balance between benefits and cost is the challenge employers face.

Features of short-term disability insurance

Short-term disability insurance is used to bridge the gap between an earned income and long-term disability insurance. It typically starts after a waiting period of a week or two, and can last between four months and half a year. It replaces a percentage of earnings up to a maximum amount.

One of the reason that the number of Canadians covered by short-term group disability insurance is less than half of the number covered by long-term insurance is because many employers rely on Employment Insurance sickness benefits. Since the EI sickness benefit pays for a maximum of 15 weeks, it is a suitable replacement for short-term disability. And because premium for EI is already paid for by both the employer and employee, the need for short-term disability insurance is reduced.

Some employers like the flexibility of designing the short-term disability insurance to meet their needs and prefer it over EI. They can opt to include it as part of their benefits package and request a reduction in their EI premiums with an application to Service Canada.

Since most Canadians are also covered by Workers’ Compensation, some plans can be designed so that short-term disability insurance only covers non-workplace related injuries and illnesses.

Here are some options an employer can choose from when designing short-term disability insurance:

  • Waiting period:
    • Accident: 0-14 days
    • Sickness: 3, 7 or 14 days
  • Benefit percentage:
    • Non-taxable: 50%, 55%, 60%, 66.7%
    • Taxable: 50%, 55%, 60%, 66.7%, 70%, 75%, 80%
  • Maximum: $500 to $1,500 weekly, or current EI maximum
  • Benefit payment period: 13, 15, 17, 26 or 52 weeks

The waiting period is the required duration of the disability before benefits start. A shorter waiting period results in more claims and is a higher cost for the employer.

Generally, employer-paid plans result in taxable benefits, while premium paid by the employee yields non-taxable benefits. Premium paid by the employee will usually be collected via a payroll deduction.

Features of long-term disability insurance

Long-term disability insurance can provide financial assistance to employees who cannot work for an extended period because of total disability. Like with short-term disability insurance, it supplements disability benefits available from government programs.

In this case, it supplements the disability benefits of CPP and Workers’ Compensation. Benefits for long-term disability insurance are reduced for any amount the employee is eligible to receive from CPP and Workers’ Compensation.

If necessary, group disability benefits are further reduced so that the total income received from all sources (except individual disability policies) does not exceed 85% of pre-disability earnings. This is done to ensure that disabled employees are not earning more than they would if they were working, and encourages a return to work, if possible.

To qualify for benefits, the employee must be totally disabled, meaning he is unable to work in his own occupation during the claim. Usually, after two years, the definition changes so that the employee must be unable to work at any occupation for which he is or may reasonably become qualified by training, education or experience to continue receiving benefits.

Here are some of the options the employer can choose from when designing long-term disability insurance:

  • Waiting period: 90, 105, 120 or 180 days
  • Benefit percentage:
    • Non-taxable: 50%, 55%, 60%, 66.7%
    • Taxable: 50%, 55%, 60%, 66.7%, 70%, 75%, 80%
    • Graded schedule incorporating several different percentages
  • Maximum: $1,500 to $10,000 monthly
  • Benefit payment period: 2 years, 5 years or to age 65
  • Definition of disability: Any occupation immediately or after 2 years of own occupation
  • Survivor benefit: None, 3 months or 6 months
  • Cost of living adjustment: 0-5%

Survivor benefits continue payments to the surviving spouse should the employee pass away while receiving disability benefits. Cost of living adjustment increases the benefit by the stated percentage each year to maintain purchasing power for the disabled individual.

Some plans also have partial disability benefits which provide a lower benefit for employees who return to work but only in a reduced capacity because of his disability. Benefits are usually payable for up to two years but end at age 65.

To encourage employees to return to work, expenses related to a rehabilitation program may be covered by the insurance company. In most cases, the disabled employee is required to participate in the program for benefits to continue.

When designing a group disability insurance plan, it’s important for the employer to consider renewal costs in addition to initial costs. Premium is adjusted on an annual basis to account for claims experience. Employers who face a large increase may have to scale back benefits after the first year. Nobody likes to have their benefits reduced, so it’s usually more prudent to start out with a less comprehensive package and increase coverage at a later time rather than doing the opposite.

Given that there is always a maximum amount of monthly benefit, high income earners may find their benefits capped. They may have to turn to other sources such as an individual insurance policy to fill the gap between the group disability insurance and their earned income.

If you have an existing group disability insurance plan with your employer, read your benefits booklet to find out the details about your coverage. Since 1 in 3 people under the age of 65 will become disabled for longer than 90 days before the age of 65 (2), it’s a good idea to find out if you have sufficient coverage.

1. A guide to disability insurance. Canadian Life and Health Insurance Association.

2. Disability probability based on the 1985 Commissioner’s Individual Disability Table A gender distinct incidence tables for Occupation class 2A, 90 day waiting period.

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