Providing for the Future
Sometimes a valued employee permanently loses the ability to work. When this is due to a job-related injury or illness, business owners legally bear partial responsibility for assuring that individual's future via disability coverage. In some situations, workers incapacitated outside the workplace likewise may be entitled to employer support.
As life insurance goes, many business owners elect this benefit as another incentive for building and maintaining a strong staff infrastructure.
Short and Long-Term Disability: When Work is Impossible
When an injury prevents an individual from working, the law demands that specific disability plans replace a portion of his or her wages. These include:
- Workers compensation. State law sets the amount of income that individuals injured on the job receive. Employees typically recover a percentage of their gross earnings or take-home pay, up to a certain limit.
- State mandatory disability plans, non-work related. New York, New Jersey, Rhode Island, California, Hawaii and Puerto Rico are the only states with state-sanctioned short-term disability plans. Available through commercial insurance companies these policies' maximum benefits vary from state to state.
- Employer-based short-term disability. When employees can't perform their duties due to illness or injury, they are considered disabled. Depending upon employment length, a portion of pre-disability income is replaced for up to 26 weeks. Coverage typically kicks in one to 14 days after the worker becomes incapacitated and/or sick leave is exhausted. Payment may replace close to 100 percent of wages in the early weeks, dropping significantly if the employee remains unable to work.
Employer-based long-term disability. Once
short-term disability coverage expires, long-term
coverage begins when an employee remains disabled. The
definition of permanent disability varies by company
and by plan, as does the amount paid to the employee.
Typically, these programs replace 50 percent to 70
percent of income; and many policies do have monthly
Some employers offer enhanced long-term disability coverage (for purchase) to give employees additional peace of mind. A number of plans also offer physical rehabilitation services.
Social Security Disability Insurance. SSDI pays
benefits to individuals who become disabled before
reaching retirement. This federal program applies to
those who can't work because they "have a medical
condition that is expected to last at least one year
or result in death." Financed with Social Security
taxes paid by workers, employers and self-employed
persons, this program stipulates that recipients must
qualify based on taxable work to be "insured." Social
Security disability doesn't cover those with
short-term or partial disability, though other
Payment amounts are subject to age conditions at the time of disability. On average, disability applications take three to five months to process. Therefore, it's wise to apply as soon as a disability occurs. Monthly benefits are based on a person's average lifetime earnings.
The Department of Labor operates a number of programs designed to prevent work-related injuries and illnesses. Information about these is available at Workplace Safety & Health (http://www.dol.gov/dol/topic/safety-health/index.htm).
Life Insurance: Passing a Little On
The following descriptions detail what's out there for business owners who want to add a special dimension to their employees' benefits packages:
Whole life insurance. Whole life insurance
offers the insured's beneficiaries benefits based on
the policyholder's entire life. Upon the insured's
death, a lump-sum payment is made. The benefit amount
is calculated when the policy is taken out, and
premiums — fixed over the policy's term — are based
upon this amount.
Keep in mind that this type of coverage doesn't account for increased wealth and expenses or higher mortgage payments if a larger home is later purchased over a person's life. On the other hand, whole life policies do carry an investment component, which accumulates a cash value that the policyholder can borrow against or withdraw.
Term life insurance. Term life insurance
considers the fluctuating risk factors over a person's
lifetime. As such, these policies change in accordance
with changes in the insured's life. Therefore, the
premiums are variable and typically much lower than
whole-life premiums. Term life insurance does not
accrue value and has no investment component.
For both whole life and term life insurance, cost factors include age, health, family history and driving record. A physical checkup is required for either policy type to assess risk factors.
- Universal life insurance. Universal life insurance has several unique features not found in whole life policies. Specifically, the policy owner is allowed to vary the timing and amount of premiums, as well as the benefit amount. These run in accordance with the policyholder's changing needs. So essentially, with universal life insurance policies, the protection, the expense and the cash value components are itemized. Separating these elements is what lends flexibility to universal life insurance plans.
- Survivorship or "2nd to die" insurance. Survivorship insurance covers the lives of two insured people, usually a husband and a wife. This product is available as universal life or whole life and pays a death benefit when the last of the two insured persons dies. Because these policies allow the insurance company to delay the payment of the death benefit until the second insured's death, liquidity is available for paying estate taxes when needed. Survivorship products are generally cheaper than individual coverage on either spouse, so are quite popular with husband-wife business owners.
Variable life insurance. Variable life
insurance combines life insurance protection with a
flexible investment plan. The policy owner may choose
to invest premiums and cash values among various,
selected products. Variable life insurance is
generally more expensive than other life insurance
products because it allows the allocation of premium
dollars to investment functions such as stocks, bonds
and equity funds.
The two types of variable life insurance are variable whole life and variable universal life. In the first, the death benefit depends on investment performance, increasing or decreasing accordingly. The death benefit, however, won't fall below a set minimum amount, as long as premiums are paid. In the latter, the insured may vary the timing and amount of premiums and the face amount of coverage.
Because of associated investment risks, variable policies are deemed securities contracts, which fall under the federal securities laws.
Group life insurance. Group life insurance
covers a specific group of lives, such as company
employees, labor union members or members of an
association. In these cases, the policy owners would
be the employer, the union and the association,
respectively. With group life insurance, the insured
can name his or her beneficiaries.
For employees of companies, group life insurance may be part of a benefits package. Because the coverage is a "wholesale" purchase, the premiums are far lower than those of individual policies. Participants receive a "certificate of credible coverage," which they must provide subsequent insurance companies should they leave their jobs and coverage is terminated.