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Can you explain the gaps in group LTD coverage?

BY Tim Landry, ALL Financial Services | January 17, 2013

It is bizarre that almost no financial advisors would suggest relying totally on group life insurance, but some allow their clients to solely depend on their group long-term disability insurance (LTD) without asking enough questions.

Why is that an issue? People can’t be certain they will be covered by their group disability insurance because there are so many ways to interpret a claim based on the terminology used in the contract. As a result of this and other characteristics of the coverage, there are four major areas in group LTD coverage that advisors must know of and inform their clients about.

First, if the group life insurance is all the client has, the insurance can be converted on leaving the company, regardless of the insured person’s state of health. This is rarely true of LTD and when it is there may be requirements that the client has a job, requests for proof of income, or limitations on the policy wording that could make it void. Employees can’t totally rely on their coverage.

Read: Extending benefits for terminated employees

Second, there is a myth—repeat myth—that large numbers equal price discounts. Beyond a maximum of approximately 25%, any further discount comes from the quality of the disability coverage. For example, if a policy, on average, costs $100, any policy that is less than $75 should make one investigate the coverage more closely.

Third, the typical group plan for LTD only protects you for two years if you are unable to do your job. After that, the insurer will generally require that the employee be unable to do any reasonable job. Some (better quality) contracts state that the new job must generate at least between 60% to 75% of what the employee was previously earning, but if no higher amount is specified, jurisprudence uses 50% as the acceptable floor. Can you live on half of what you have traditionally earned? Also, there is no requirement that an employee must be able to obtain that lower paying job, only that he or she be able to do it.

Lastly, the typical group LTD plan is an all-or-nothing product, unlike other forms of insurance. To compare to other types of insurance: if a fire did $100,000 damage to your $200,000 home and if your home insurance company said ‘it’s not a total loss, so we pay nothing.’ What your reaction be? This is what some group LTD plans are like. “Partial loss” can be equated to the early stage of cancer or MS, or the recovery after a heart attack. “Partial loss” is what is most likely if an employee’s job is not very physically demanding. If you earn your income with your knowledge and communication skills, it is very difficult to be totally disabled, particularly if you are highly motivated to work.

So, how do you ensure clients are buying the kind of disability coverage they want? Be sure to ask the following additional questions about any plan your clients have in place or any they intend to set up:

  • How is “injury” defined? Watch out for “directly and independently of all other causes”.
  • What disabilities are excluded from coverage or limited in duration of payment?
  • Can you take the coverage with you if you change employers or open your own business?
  • What is the definition of “income”?
  • Remember that employees will only know the conditions of the plan and the terms of payment once they become disabled. This is because group plans can change over time both when the carrier changes and when the employer/carrier decide to change terminology to control prices. Be sure to communicate this to employees.

This article is sourced from 

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