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Part Two: Retirement, Health Care, and Life Insurance

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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.

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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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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Disability Insurance

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Typically takes two forms:

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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.

Disability Insurance

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.

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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Origins of Disability Insurance and Workers’ Compensation Insurance

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Prior to workers’ compensation laws, companies used one of three common-law defenses when sued by an employee:

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Assumption of risk

Showing the injury resulted from an ordinary hazard of employment of which the worker should have been aware.

Fellow worker rule

Showing the injury was caused by a fellow worker’s negligence.

Contributory negligence

Showing the worker’s own negligence contributed to the injury, regardless of any fault of the employer.

Origins of Disability Insurance and Workers’ Compensation Insurance

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.

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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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.

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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Short-Term Disability Insurance Programs

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Classified as an inability to perform one’s regular job duties, including:

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Recovery from injuries

Recovery from surgery

Treatment of an illness requiring hospitalization

Pregnancy and child birth

Short-Term Disability Insurance Programs

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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Short-Term Disability Insurance Programs

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.

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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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.

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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Company-Sponsored Disability Plans and Benefits Laws

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Four benefits laws influence the design and implementation of company-sponsored disability plans.

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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

Company-Sponsored Disability Plans 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.

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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Company-Sponsored Disability Plans 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.

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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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.

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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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

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Three kinds:

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Term life

Whole life

Universal life

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

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Companies usually must cover at least 10 full-time employees and may offer one of two plans:

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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.

Exhibit 6.1

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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)

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State compulsory disability laws created workers’ compensation insurance programs.

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Workers’ compensation insurance programs

are run by individual states, and

are designed to cover expenses incurred in employee work-related accidents and injuries.

State Compulsory Disability Laws (Workers’ Compensation)

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

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Primary Obligations of State Workers’ Compensation Programs

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State Compulsory Disability Laws (Workers’ Compensation)

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.

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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State Compulsory Disability Laws (Workers’ Compensation)

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

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In 2015, employers paid:

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$940 annually per employee.

$2,630 for construction workers.

$582 for leisure and hospitality workers.

Wide variation in the cost from state to state.

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.

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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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.

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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Workers’ Compensation Claims

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Employers can make three kinds of claims for workers’ compensation benefits:

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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.

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.

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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Types and Amounts of Workers’ Compensation Benefits

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Four types of disabilities:

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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

Permanent partial disabilities

Allows individuals to perform limited amounts of work until making a full recover.

Limits the kind of work that individuals perform on an enduring basis.

Types and Amounts of Workers’ Compensation Benefits

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.

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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Types and Amounts of Workers’ Compensation Benefits

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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Types and Amounts of Workers’ Compensation Benefits

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’ Compensation Programs

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Four possible exceptions to employer immunity from legal action:

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An employer’s intentional acts.

Lawsuits alleging employer retaliation.

Lawsuits against non-complying employers.

Lawsuits relating to “dual capacity” relationships.

Employers’ Rights under Workers’ Compensation Programs

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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Employers’ Rights under Workers’ Compensation Programs

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.

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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Employers’ Rights under Workers’ Compensation Programs

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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Employers’ Rights under Workers’ Compensation Programs

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.

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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