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Disability Income Insurance Coverage

Given the widespread disability coverage provided through employer-sponsored long term disability plans, what is the market for self-paid disability income insurance?  Our clients with this type of coverage generally fall into two categories.  The first category consists of individuals who do not have access to an employer-sponsored long term disability plan, but wish to have some disability coverage in place.  This includes persons who are self-employed, run a sole proprietorship, or who own or are employed by a small business that does not maintain a long term disability plan for its employees.  Our clients in this category have included doctors, lawyers, pharmacists, podiatrists, chiropractors, dentists, artists, computer consultants, designers, freelancers, and gallery/shop owners.  The second category consists of high earners who purchase supplemental disability income coverage because their existing coverage (whether provided through an employer-sponsored group long term disability plan or otherwise) would replace only a small portion of the earnings they would lose as a result of disability.  Our clients in this category have included doctors, CEOs, bankers, investment advisors, managing partners, corporate presidents and vice presidents, upper management professionals, IT directors, and law firm partners.  

In most cases, a self-paid disability income policy will be treated as a private contract governed by the contract and insurance law of the state in which the policy was issued and delivered.  A policy will generally be deemed “issued and delivered” in the state where the policyholder resides, where the policyholder’s business is located, where the insurer is licensed to issue disability income insurance policies, and where the policyholder completed the application for the policy.  These are all usually the same state, making the governing state law clear.  In other cases, however, these connections to the policy may implicate one or more additional states, leading to a more complicated question of which state’s law will apply.  In addition, disability income insurance policies sometimes include choice-of-law provisions that may be deemed to trump the normal rules and to specifically designate the state whose law will govern the policy.

In some cases, the federal law governing most employer-sponsored plans – the Employee Retirement Income Security Act (ERISA) – may also apply.  Generally, ERISA will be deemed to apply if the disability income policy was issued as a component of a more comprehensive employer plan.  If the company is small, an employer may choose to provide each employee with an individual disability income insurance policy, rather than establishing an umbrella long term disability plan for the entire group.  In other cases, the employer may establish a “basic” long term disability plan, but offer “supplemental” or “opt-up” disability coverage for those employees who want it.   For example, a plan may provide a basic 66-2/3% long term disability benefit, with a maximum top benefit of $5,000 per month.  This means that those earning $7,500 per month ($90,000 per year) would receive the maximum disability benefit.  For those earning more than $90,000 per year, the plan may permit the purchase of supplemental disability coverage up to 66-2/3% of their earnings.  Someone earning $180,000 a year ($15,000 a month), could purchase a supplemental disability benefit of $5,000 per month, so that instead of receiving $5,000 in event of a disability (33-1/3% of their earnings), they would receive $10,000 per month (66-2/3%).  Another example is the employer who offers basic long term disability plan that covers only 50% of earnings, but allows employees to opt up to higher benefit percentage levels, such as 60%, 66-2/3%, or 70%.  For an employee earning $7,500 a month, the basic disability benefit would be $3,750, but by selecting the 66-2/3% option, the total disability benefit can be increased to $5,000 per month.  Although the supplemental/opt-up portion of the disability benefits in these plans may be provided through a simple increased benefit amount, some employers choose to provide this additional disability coverage in the form of a self-contained, employee paid disability income insurance policy – sometimes with a completely different insurance company.  Even so, such disability income policies are generally considered a component of a larger employer-sponsored plan and may be subjected to federal ERISA law on that basis. 

Whether a disability income insurance policy is governed exclusively by state law exclusively or by a combination of state and federal ERISA law, the sorts of considerations and disputes that arise in the context of ERISA-governed long term disability plans can occur in the context of disability income insurance policies.

There are differences, however.  When the disability income insurance policy is not governed by ERISA because obtained independently and not as part of an employer-sponsored plan, the rights and procedures involved can be substantially different – and in many cases more favorable – than those governing ERISA plans.  Some of the important differences are discussed here:  Special Rules Governing Privately Purchased Individual Disability Income Policies.

Different sorts of issues may arise under an individual disability income insurance policy than arise under an ERISA group long term disability plan.  Disability income policies commonly include provisions that aren’t offered in long term disability plans.  In addition, different issues may arise because of the distinct clientele for disability income policies (such as small business owners, and high wage earners), in contrast to the average ERISA long term disability claimant (who is usually a salaried staff employee). Our clients with disability income insurance policies have encountered a number of distinct, recurring issues with their disability insurance companies.  Some of these issues are discussed here:   Disability Income Insurance Policy Issues.

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