Why Insure For Short-Term Disability?
Nearly half of human resource professionals in a recent survey stated that the rate of disability claims at their companies had increased during the last two years. The impact of this to employers is that an average of 8% of total payroll is spent on disability each year. Regardless of the revenues of a firm, that has a significant effect on the bottom line.
Most firms offer some sort of long-term disability program, at least to their top employees. The irony here is that short-term disability claims occur much more frequently (75 claims per 1,000 lives) versus 7 claims per 1,000 for long-term disability claims. Maternity claims alone account for 22% of all short-term disability claims.
When you compare short-term disability costs to workers compensation and long-term disability costs, short-term disabilities represent a higher percentage of both direct costs (sick pay, salary continuation and insurance premiums) and indirect or “hidden” costs (replacement workers, reduced productivity and lowered morale). It is the hidden causes that drive the total costs of disability, and create the need to address the problem either on a fully insured or partially insured basis.
Moreover, most people do not have adequate savings to carry them through a period of short-term disability. If you consider that the average employee has savings to last about five weeks (which is probably inaccurate in today's economy), having to wait 90 to 180 days for long-term disability to begin paying would deplete or drastically reduce most savings accounts. Providing a short-term program can be a terrific solution to maintaining employees pay, protecting their savings and maintaining strong morale among employees. But how do you pay for it?
Most employers offer a set number of paid sick and personal days each year. Few companies will actually track their short term disability experience, yet employees usually use their days, whether they are truly need to or not - the reason being the employer will take them away if they do not use them. This means that many employees use some sick days as vacation days, often around the holidays, which can leave a company severely short-handed.
In further analyzing disability costs, consider this typical scenario,
Employee earning $2500 per month or $125 per day
Employee also contributes $150 of revenue to the company per day
Employee is offered 10 sick and personal days per year
Each day the employee is absent costs the employer $275 per day ($125 + $150). If the firm cut the number of sick days to five, the savings would be huge. Please consider this possible scenario:
Company has 150 employees
Sick and Personal days saved (150 employees x 5 days reduced) = 750
Additional revenue to the firm (750 x $275) = $206,250
How to Fund the Plan
To fully insure a typical short-term disability plan, the costs will be roughly .5% of covered monthly payroll. So, a firm with 150 employees and $375,000 of monthly covered payroll spends about $1,800 a month or $21,600 annually. If you currently fully insure short-term disability and the cost is more than this, it may be possible to reduce those costs through the following measures:
Shop the market. Disability insurers vary in terms of the industries they aggressively go after. Also, their block of business may have extraordinarily poor results in a particular industry, causing rates to be high for that SIC (Standard Industrial Classification) number. Finding the appropriate company for your industry and group demographics can save a significant amount of money.
Furthermore, companies vary as to when they require an experience report for claims history. For example, if a company has 125 employees and has experienced heavy losses for short-term disability, they are probably going to pay a lower rate going to an insurer who does not begin experience rating until the group size is 150 lives.
Package the coverage. Most companies offer discounts if long-term disability is purchased through the same insurer. Packaging life insurance, dental insurance and long-term care insurance with the same carrier can also trigger similar discounts.
Monitor the plan. Your insurer can provide experience exhibits at any time to keep you posted on your claims activity. If you notice a number of mental and nervous related claims for example, providing an employee assistance benefit (at least one company includes this in their LTD plan) can greatly reduce these claims. Modifying when benefits begin, their duration, and percentage of replacement can also help lower costs. Variations on a fully insured plan are to offer contributions to a plan. For example, an employer can fund 50% (or any other percentage) of the cost of the plan to the employee. Another option is a Flex Plan, where the employer funds a basic benefit and the employee can opt to buy-up coverage that more adequately meets their needs. This approach works well for employers who want a program but want to share cost with employees. The advantage here over the partial contribution plan is that the employer does not have to fund the cost for those employees who do not feel the need to have full coverage.
Another option is to have an Administrative Services Only plan for short-term disability. This means that the company is responsible for paying the claims, but an insurance company is making decisions regarding claims. This works well where claims are abnormally low or when the company wants to take a more active role in the management of the plan's effectiveness. Moreover, most employers want to get disabled employees back to work quickly — they are just not equipped for it. Early intervention is key to gaining control of overall disability costs and an ASO plan can meet this need.
Having the insurer involved for making claim decisions eliminates liability to the company and can drastically reduce claims costs through early intervention, rehabilitation and return to work efforts, as well as possibly preventing short-term disabilities from becoming long term claims.
Most employers overestimate the cost of an insured plan by as much as 100%. In fact, when compared with other employee benefit programs such as retirement, medical, workers compensation, Social Security disability, group short term disability costs much less: Premiums average about $12 a month for each employee. Regardless of how it is funded - Employer paid fully insured, employer partial contribution, flex short-term disability (base and buy-up), ASO or pure voluntary (100% employee paid), a short-term disability plan is essential for a company to fix and manage their short term disability costs.
Sources
- John Hewitt and Associates 2008 Disability Fact Book
- Unum Life Insurance Co.
Figures are hypothetical and for illustrative purposes only.
