HR 205 Ch06 martocchio 6e

6 – 1
Part Two: Retirement, Health Care, and Life
Insurance
Chapter Six: Employer-Sponsored Disability Insurance,
Life Insurance, and Workers’ Compensation
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.

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Learning Objectives
 In this chapter, you will gain an understanding of:
− employer-sponsored disability plans.
− employer-sponsored life insurance plans.
− state compulsory disability laws (workers’
compensation).

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Overview
 Chapter six explores three types of benefits
providing financial support for disabled or
deceased workers’ families.
− Employer-sponsored disability insurance and life
insurance are discretionary.
− Workers’ compensation, is mostly required by law.
 This chapter examines the similarities and
differences between these programs.

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Disability Insurance
 Replaces income for employees unable to
work due to illness or injury.
− Employer-sponsored disability applies to both
work-related and nonwork-related illness/injury.
− Workers’ compensation applies only to work-
related disability.
 Much like health-care, companies usually:
− have an insurance policy for which they pay
premiums.

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Typically takes two forms:
Short-term
disability insurance
• Provides benefits
for limited periods
of time, usually
less than one year.
Long-term
disability insurance
• Provides benefits
for extended
periods of time,
anywhere from six
months to life.

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 Short-term and long-term plans may overlap,
but not replace, mandated disability benefits.
− Discretionary company-sponsored plans
supplement legally required benefits.
 Sick leave policies are separate from disability.
− Sick leave compensates employees when they are
occasionally absent due to minor illness or injury.
− Sick leave benefits are paid from the regular
payroll, rather than through insurance policies.

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Origins of Disability Insurance and
Workers’ Compensation Insurance
 Began with industrialization in the late 1800s.
 States first created workers’ compensation.
− First law was passed in 1911.
− By 1948, every state had such laws.
 Two principles behind workers’ compensation:
− Employers are liable for benefits for occupational
disabilities, regardless of fault.
− Employers should assume the associated costs.

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Prior to workers’ compensation laws, companies used one of
three common-law defenses when sued by an employee:
• Showing the injury resulted from an
ordinary hazard of employment of which
the worker should have been aware.
Assumption
of risk
• Showing the injury was caused by a fellow
worker’s negligence.
Fellow
worker rule
• Showing the worker’s own negligence
contributed to the injury, regardless of any
fault of the employer.
Contributory
negligence

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 Prior to the 1960s, there were three forms of
disability insurance:
− Employer-created establishment funds provided
disabled workers with minimal cash payments.
− Individual disability insurance, offered by
insurance carriers.
− Group disability insurance.

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Coverage and Costs of Disability
Programs
 Of workers in 2015:
 38% had a short-term
disability plan.
 32% had a long-term
disability plan.
 Among full-time
workers:
− 49% had long-term,
− 44% had short-term.
 Among part-time
workers:
− 14% had long-term,
− 5% had short-term.
 Employers spent
annually:
− $125 /employee for
short-term, and
− $104 /employee for long-
term disability insurance.

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Short-Term Disability Insurance Programs
Classified as an inability to perform one’s regular job
duties, including:
Recovery from
injuries
Recovery from
surgery
Treatment of an
illness requiring
hospitalization
Pregnancy and
child birth

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 Most plans pay the
employee:
− 50% to 67% of their pay
− Some pay 100%.
 Benefits paid usually no
more than a year.
 Most companies set a
monthly maximum
amount.
 Three additional
features of short-term
disability plans include:
− a preexisting condition
clause,
− waiting periods, and
− exclusion provisions for
designated health
conditions.

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 A preexisting condition is a disability
diagnosed prior to enrollment in a plan.
 Waiting periods include:
− The pre-eligibility period spans from hire date to
coverage date.
− An elimination period is the minimum time
before benefit payments begin.
 Exclusion provision list particular health
condition not covered by the disability plan.

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Long-Term Disability Insurance Programs
 Insurance carriers use a two-stage definition:
− At the first stage, long-term disability refers to an
illness or injury preventing an employee from
performing his “own occupation” over a
designated period, often up to two years.
− The second-stage definition adds the phrase
inability to perform work in any occupation.

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Long-Term Disability Insurance Programs
 Traditionally, long-term disability only
covered total disabilities.
− Recently, carriers have added partial disabilities
inclusion where insurance covers a portion of
income loss while the person works part-time.
 Maximum benefits usually equal 50% to 70%
of monthly pay, subject to a maximum amount.

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Funding Disability Insurance Programs
 Employers may fund in three ways:
− independent insurance companies,
− partial self-funding (mainly for long-term), and
− full self-funding.
 Two considerations when choosing funding:
− the size of the employee group, and
− estimating exposure or liability.
• Exposure is the anticipated annual disability claims.

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Company-Sponsored Disability Plans
and Benefits Laws
Four benefits laws influence the design and
implementation of company-sponsored disability plans.
The Age
Discrimination in
Employment Act
of 1967 (ADEA)
The Americans
with Disabilities
Act of 1990
(ADA)
The Employee
Retirement Income
Security Act of
1974 (ERISA)
States workers’
compensation and
Social Security
disability
regulations

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and Benefits Laws
 The Older Workers Benefit Protection Act
(OWBPA) is a 1990 amendment to the ADEA.
− Generally bans the termination of long-term
disability benefits based on age.
− Applies the equal benefit or equal cost principle.
 The Americans with Disabilities Act of 1990
prohibits discrimination against qualified
individuals with a disability.

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and Benefits Laws
 ERISA regulates company-sponsored benefits
practices, including disability insurance and
life insurance.
 State workers’ compensation and Social
Security disability regulations.
− Employees may receive long-term disability from
public programs and company-sponsored plans.
− Some plans may include an offset provision that
reduces benefits by subtracting a percentage.

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Life Insurance
 Employer-sponsored life insurance
− protects family members by paying a specified
amount upon an employee’s death.
− Most benefits equal some multiple of salary.
− Most plans include accidental death and
dismemberment claims.
− Can be an individual policy or a group plan.
• Group plans cover employees while employers finance
the plan partly or entirely.
• More people can participate at a lower cost per person.

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Life Insurance
Origins
 Industrialization and wage
freezes during WWII, and
 Favorable IRS tax codes led
to Social Security.
 Workers’ compensation and
private disability insurance
led to the advent of life
insurance.
Coverage and Costs
 In 2015,
− 72% of full-time, and
− 13% of part-time employees
− Were offered life insurance.
 On average, companies
spent $83 annually per
employee to provide life
insurance coverage.

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Types of Life Insurance
Three kinds:
Term life
Whole
life
Universal
life

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Types of Life Insurance
 Term life insurance provides protection only:
− during a specified number of years, or a maximum age
when the policy expires and no benefits are paid.
 Whole life insurance pays specified amount and
does not expire and is more expensive.
− Also a savings plan, accumulating interest.
 Universal life insurance provides protection
similar to term life insurance with a flexible
savings or cash accumulation plan.

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Group Term Life Insurance
Companies usually must cover at least 10 full-time
employees and may offer one of two plans:
Contributory plans
• Employees pay the
entire insurance
premium, or
• They share the cost
with the employer.
Noncontributory plans
• The employer pays the
entire premium within
designated limits.
• Most common as
employers enjoy higher
tax benefits.

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Exhibit 6.1
Uniform Premiums for $1000 of Group
Term Life Insurance Protection

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Universal Life Insurance
 Combines features of term life and whole life.
 Created to provide more flexibility, allowing
policy owner to shift money between insurance
and savings components of the policy.
 Permits the cash value of investment to grow
at a variable rate tied to the market.
 Leads to changes in premium, benefits, and
payment schedules.

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Accidental Death and Dismemberment
Insurance
 Accidental death and dismemberment
insurance (AD&D) covers death or
dismemberment as a result of accidents.
− Dismemberment is either
• a loss of two limbs, or
• complete loss of sight.
− Does not pay survivor benefits.
− Premiums are lower than life insurance.
− Losing relevance for several reasons.

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State Compulsory Disability Laws
(Workers’ Compensation)
State compulsory disability laws created
workers’ compensation insurance programs.
Workers’ compensation insurance programs
are run by individual states, and
are designed to cover expenses incurred in
employee work-related accidents and injuries.

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 Six basic objectives of workers’ compensation:
− To provide income and benefits for work-accident
victims, regardless of fault.
− To provide a single remedy, reducing court costs.
− To relieve charities of financial drains.
− To eliminate lawyer fees and time consuming trials.
− To encourage employer interest in safety.
− To promote a transparent study of accidents.

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Exhibit 6.2
Primary Obligations of State Workers’
Compensation Programs

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 Workers’ compensation differs from Social
Security disability insurance and Medicare.
− Medical care from immediately after the injury.
− Temporary benefits after three to seven days.
− Permanent partial and permanent total disability to
workers with lasting consequences of disabilities.
− Rehabilitation and training benefits.
− Benefits to survivors of workers who die from
work-related causes.

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 Social Security, in contrast, pays benefits:
− To workers with long-term disabilities from any
cause, but only when disabilities preclude work.
− For rehabilitation services.
− For survivor benefits to families of deceased
workers.

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Coverage of Workers’ Compensation
Programs
 Employers must fund programs according to
state guidelines.
 Participation is compulsory in all states, except:
− New Jersey, Oklahoma, and Texas.
 Maritime workers’ compensation is mandated
by the Longshore and Harborworkers’
Compensation Act.
 Federal workers are covered under the Federal
Employees’ Compensation Act.

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Cost of Workers’ Compensation
Insurance
In 2015, employers paid:
$940 annually
per employee.
$2,630 for
construction
workers.
$582 for leisure
and hospitality
workers.
Wide variation
in the cost from
state to state.

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Financing Workers’ Compensation
Programs
 Employers usually use private carriers.
− Or, sometimes, state funds.
 A third option, self-insurance, requires
deposits of surety bonds to pay claims directly.
− Many employers select this for greater discretion
in administering their own risks.
 The insurance commissioner of most states
sets the maximum premium rates.
− Based on each $100 of payroll.

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Financing Workers’ Compensation
Programs
 States rely on ratemaking service organizations
to set initial rates.
− Ratemaking service organizations collect data on
workplace accidents and produce rating manuals.
− Rating manuals specify insurance rates based on
classifications of businesses.
− Second-injury funds are an important funding
element of programs whose claims are associated
with preexisting conditions.

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Workers’ Compensation Claims
Employers can make three kinds of claims for workers’
compensation benefits:
An injury claim
• A claim for a
disability
resulting from an
accident during
course of work
duties.
An occupational
disease claim
• Results from a
disability caused
by an ailment
associated with a
particular
industrial trade or
process.
A death claim
• Compensation
for a death
occurring in the
course of
employment or
caused by
injuries or
occupational
diseases.

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Types and Amounts of Workers’
Compensation Benefits
 Unlimited medical care.
− Medical care is paid for regardless of amount.
− Fee schedules list maximum procedure amounts.
 Disability income.
− Compensates individuals with work-related
accidents or illnesses which limits their abilities.
− Benefit amounts depend on the nature of the
disability.

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Four types of disabilities:
Temporary total disabilities
• Preclude individuals from performing meaningful work for a limited period,
eventually making a full recover.
Permanent total disabilities
• Prevent individuals from ever performing any work.
Temporary partial disabilities
• Allows individuals to perform limited amounts of work until making a full
recover.
Permanent partial disabilities
• Limits the kind of work that individuals perform on an enduring basis.

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 Permanent partial disabilities fall into one of
two categories:
− Scheduled injuries
• involve the loss of a member of the body including an
arm, leg, finger, hand, or eye.
− Nonscheduled injuries
• are general injuries of the body that make working
difficult or impossible.
− Head or back injuries are examples.

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 States rely on one of three approaches to pay
benefits for permanent partial disabilities of
the unscheduled type:
− Impairment approach bases benefits on the
physical or mental loss associated with an injury
− Wage-loss approach bases benefits on the actual
loss of earnings resulting from injuries.
− Loss of wage earning capacity approach factors
in human capital and the type of impairment.

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 Death Benefits are awarded in two forms:
− Burial allowance and survivors’ benefits.
• Burial allowances are a fixed amount, varying by state.
• Survivor benefits are paid to the spouses and dependent
children of deceased workers.
 Rehabilitative services cover physical and
vocational rehabilitation.
− Available in all states.

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Employers’ Rights under Workers’
Four possible exceptions to employer immunity from
legal action:
An employer’s
intentional
acts.
Lawsuits
alleging
employer
retaliation.
Lawsuits
against non-
complying
employers.
Lawsuits
relating to “dual
capacity”
relationships.

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 Two kinds of lawsuits allege intentional acts:
− Deliberate and knowing torts entails an
employer’s deliberate and knowing intent to harm
at least one employee.
− Violations of an affirmative duty happen when
an employer fails to reveal the exposure of one or
more workers to harmful substances,
• or when the employer does not disclose a medical
condition typically caused by exposure.

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 Employees possess the right to sue employers
to retaliate for filing workers’ compensation.
− Employers possess the burden of proof.
 Employer noncompliance may lead to:
− lost immunity,
− monetary penalties,
− criminal penalties, or
− liability for the full cost of workers’ claims.

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 Dual capacity is a legal doctrine applying to
the relationship between employers and
employees.
− A company may fill a role for an employee that is
different from its role as employer.
− If employer meets its obligations under law, it may
be susceptible to common-law actions.
− An employer’s immunity does not protect it
against common-law actions by employees.

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 Employer defenses that injuries were work-
related:
− preexisting conditions,
− employee negligence,
− employee misconduct, or
− safety violations by the employee.

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Summary
 Chapter six reviewed two discretionary
protection programs:
− employer-sponsored disability and life insurance.
 The chapter also reviewed workers’
compensation protection, which is mandatory
in all but three states.
 These programs provide backup to workers
and their dependents for work-related and
nonwork-related injuries, illnesses, or death.

HR 205 Ch06 martocchio 6e

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