Providing for the Future
When a valued employee loses the ability to work due to a job-related injury or illness, a business owner legally bears partial responsibility. While the law requires workers compensation to replace a portion of wages, life can be full of the unexpected, so it is important to be prepared. Life and disability insurance can provide peace of mind for an employee who may be concerned about how his or her family will cope in the event of an unexpected death, or how they will meet financial obligations in the event of an unforeseen injury. Offering employees this valuable benefit can provide the security of the safety net in an unexpected emergency.
Below are some of the mandatory and optional programs available for small employers to consider:
- 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 - depending upon employment length, a portion of pre-disability income is replaced for up to 26 weeks. Coverage typically kicks in 1 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 has expired; 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 maximum monthly payouts.
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 - 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 by 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 programs do.
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 (https://www.dol.gov/).
The following descriptions detail the options available for business owners who want to add a special dimension to their employees' benefits packages:
- Whole life insurance - offers the beneficiaries benefits based on the policyholder's entire life. Upon 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 on 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 - considers the fluctuating risk factors over a person's lifetime. 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 - 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 lends flexibility to universal life insurance plans.
- Survivorship or "2nd to die" 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 typically cheaper than individual coverage on either spouse, so are quite popular with husband-wife business owners.
- 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 usually 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 - 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.