What comes to mind when you think about a disability? If you’re like most people, you may picture an employee getting injured at work or experiencing a catastrophic accident. However, reality paints a far different picture. More common causes of disabilities include illnesses such as heart disease, central nervous system disorders, and cancer. In fact, musculoskeletal issues such as back pain and arthritis are the top cause of disabilities today1.
These disabilities may not be what you envisioned, but they are just as real. That’s why it’s critical to help protect your employees, and those who depend on them, from an event that can have a potentially devastating impact on their income — and their lives. There’s another benefit to helping your employees — as the employer, you have much to gain by offering disability income insurance.
Protect Your Employees and Attract Talent
Most people think a disabling injury or illness will never happen to them or their employees. But the fact is, one in four 20-year-olds will become disabled before they retire2. And it can have serious financial consequences. While Social Security Disability may help replace some of the income an employee loses while they’re disabled, it only pays about $1,145 a month on average3 — which is often a fraction of an individual’s income. And unless the disability is one of the five percent that’s incurred at work, Worker’s Compensation won’t help1.
Disability benefits won’t replace a disabled employee’s entire income, but they will help cover the basics like rent, groceries and bills. That way, the individual will feel less financial stress as they recover and get ready to go back to work.
Offering disability income insurance to your employees as part of their benefits package sends the message that you care about their well-being, which can help build a positive and productive work culture. And, there’s something in it for you, too — offering disability income insurance can help you attract and hold onto employees, since not all companies offer this benefit.
Two Types of Long Term Disability Income Insurance
There are generally two kinds of disability insurance that you can offer your employees: group long term disability insurance (GLTD) and individually underwritten disability income insurance.
Many businesses offer GLTD as part of their standard benefits package. Typically, a GLTD plan will cover about 60 percent of an employee’s base salary, up to a monthly limit. Bonus and other incentive income are often excluded. In many instances, the company pays the premiums for the policy and the premiums paid are generally considered a deductible business expense for tax purposes4.
For an employee whose company pays the GLTD premiums, the benefits received (after a waiting period of usually 180 days) from the group policy will be taxable. This can leave the employee with a significant “income gap” — the difference between the net benefits they receive from GLTD and their pre-disability earnings. And based on the coverage in force at the time, its monthly caps, and potential exclusion of incentive income, highly compensated employees may receive far less than 60 percent of their income.
Because of this “gap,” many businesses also make available supplemental disability income insurance to some, or all, of their employees.
Individual Disability Income (DI) Insurance for More Coverage
What makes individual DI insurance an attractive benefit to employees is that it allows them to cover a higher proportion of income, (including bonus and incentive income), the benefits are tax-free (when employees pay the premium), and the policy is portable, meaning the employee owns their DI policy and can take it with them wherever their career may lead.
You can offer your employees individual DI as a voluntary benefit either to supplement existing GLTD, or in place of GLTD. Your employees would be responsible for their own premiums and, depending on the number of eligible employees, discounts and simplified underwriting may be available. Individual DI could also be offered only to a select group of employees, either on a voluntary basis or as part of an employer paid benefit. As an employer-paid benefit, the premiums paid would be a tax-deductible expense to the company. This is an effective and efficient way to attract and retain top talent.
Individual DI policies may also offer your employees optional riders (for an additional charge) above and beyond what a GLTD plan might offer. These could include coverage of partial disabilities, an expanded definition of disability, cost-of-living adjustments or protection of retirement plan contributions.
Advantages for You and Your Workforce
Given that disabling illnesses and injuries aren’t as rare as you might think, making DI insurance available to your employees can help make a significant difference in their lives by providing much-needed financial help in the event of a disability. If you are the owner of a business looking for cost effective ways to recruit and retain employees — or are just concerned about your employees’ well-being — offering disability insurance is a smart choice.
1 Council for Disability Awareness, 2014 Long Term Disability Claims Review2 Social Security Administration, Fact Sheet April 2, 20143 Social Security Administration Statistical Snapshot, August 2014
4 The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
MassMutual does not provide group long term disability insurance.
Note: There may be implications under the Employment Retirement Income Security Act (“ERISA”) depending on how disability income insurance policies are made available to the employees and whether such an arrangement constitutes an “employee benefit plan” under ERISA. Employers should consult their own tax and legal advisors for further information on potential ERISA implications.
Insurance products issued by Massachusetts Mutual Life Insurance Company
(MassMutual) Springfield, MA 01111-0001 and its subsidiaries C.M. Life Insurance Company and MML Bay State Life Insurance Company, Enfield, CT 06082.