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Taxation of benefits… Benefits are TAXABLE when premium is employer paid, creating a situation whereby only a maximum of 40% of income is retained (with 60% of income covered) AFTER taxes (see #2-3-8 below for other possible reductions).
- Benefit amount… usually 60% of income with be covered as mentioned above and that is NOT guaranteed, since income can have fluctuated prior to the time of a claim. Caps (maximum coverage) are usually $5—10k/ month, depending on the policy’s specifications. See 20 below.
- Offsets… Benefit amount can be REDUCED by other income sources e.g., social security, workman’s compensation etc., thus further reducing the 60% coverage (40%net… see 1-2 above).
- Portability…employee doesn’t get a policy, only a certificate, which usually is NOT portable.
- Plan administration…time consuming (only applies to group LTD, not association plans)
- Option choices…may be limited (usually; no COLA/Residual, FIO etc.)
- Definition of total disability (own-occupation)… may NOT allow benefits to be paid to 65, rather only for 2-5 years, and then another definition takes over, which is much more restrictive.
- Bonus…normally NOT covered, again creating a coverage amount shortfall (see 1-2-3 above)
- Contractual wording… protects the carrier more than the insured (definitions, rate increases etc.).
- Rates… NOT guaranteed, can be increased unilaterally.
- Renewability… NOT guaranteed, coverage can be cancelled anytime by carrier, also coverage normally terminates at 65, just when it is needed the most.
- Claims… due to the coverage possibly being governed by ERISA, acts of bad faith by the carrier, may not be discouraged and as a result, under ERISA, claimant can NOT sue for punitive damages, therefore, a claim can possibly drag on longer than if it were an Individual DI policy.
- Timing of Claims… can only be submitted while working and while coverage is in force.
- Pre—existing conditions… may create an unanticipated problem at claim time.
- Contract wording… can be changed by the carrier ANYTIME, to be less favorable to the insured (see 9 above)
- Mental nervous claims will be paid ONLY for two years (see 9 above); unfortunately, it is the law in California
- Recovery Benefit…none (see 6 above)
- COLA conversion… none (see 6 above)
- Presumptive disability…none (see 6 above)
- Caps may create a “reverse discrimination” issue (see 1,2,3,8 above)! When there is a $5k cap, the highly compensated employee (HCE) who makes more than $100k/year will get less than the 60% as does everyone else! Example, when a HCE makes $200k, then they are only getting 30% of their income covered.
- Sickness when Manifested (better) vs. Contracted wording (see 6above)
- Elimination period… must be continuous vs. “stop/go” (better)
- Residual benefit, if available, will have a restrictive calculation
NOTE:Please bear in mind, while rare, there are always exceptions to some of the 23 deficiencies listed above, e.g. number 8 etc. and in all cases the current master policy will govern.