Lesson 4 Flashcards
(35 cards)
1.1 Identify 4 key characteristics of LTD plans
1) Benefits are only pay able after an elimination period (usually covered under sick benefits, WI/STD, CPP/QPP, WC, or EI)
2) The definition of disability relates to the plan member’s ability to perform his or her own occupation or any occupation
3) The monthly benefit is usually a percentage of the plan member’s pre-disability earnings
4) The benefit period usually ends at the earliest of the plan member’s recovery or the age 65
1.2 Explain how the length of the elimination period for LTD impacts premiums charged by insurers
The longer the elimination period the lower the premium.
This is because a longer elimination period increases the chance the member will return to work before becoming eligible for LTD benefits.
1.3 Define “any occ” in the context of LTD plans
Where the member’s disability renders them unable to perform any occupation for which the member is or may reasonably become, suited to perform based on education, training, or experience
1.3.b Define “own occ” in the context of LTD plans
The member is considered by the plan to be totally and permanently disabled if they cannot perform the regular duties of their own occupation
2.1 Explain the significance of the LTD benefit formula and detail what typical income replacement is
A LTD benefit typically replaces 50-75% of a plan member’s gross income and is subject to a maximum dollar amount.
The LTD formula selected is significant because it affects the amount of benefit received by a plan member and the cost to the plan sponsor.
2.2 List the factors that are considered when a plan sponsor sets its LTD benefit formula (7)
1) Tax implications
2) Benefit maximums
3) Direct and indirect offsets
4) Definition of earnings
5) Recurrent disability
6) COLA
7) Partial disability and residual disability provisions
2.3 Describe the tax implications when a plan member pays some or all LTD premiums
Benefits received aren’t taxable if the employee pays the premiums or if the employer pays the premium on behalf of the disabled employee during an elimination period for benefits but the amount paid as premium is reported as taxable income.
If a plan member only pays a portion of the premiums the taxable portion is equal to the benefit received less the sum of contributions paid by plan member since Dec 31, 1967 and for which deductions haven’t previously been made.
LTD benefits paid from a self funded plan are subject to plan sponsor and plan member CPP/QPP and EI contributions.
2.4 Outline how pre-disability earnings are defined in LTD plans - what is included?
Gross earnings immediately prior to the date of disability.
Can include bonuses, commissions, and overtime when earned on a regular basis.
Commissions are usually based on the average for the past 24 months.
2.4 Outline the level of benefits usually provided in LTD plans
Where benefits are non-taxable 55%-67% of gross earnings.
A lower benefit is applied if the gross benefit is above a certain amount.
Where benefits are taxable the amount of benefit is between 55% and 75%
2.6 Identify 5 factors a plan sponsor considers when deciding whether to implement a taxable or nontaxable LTD plan
1) In a nontaxable plan member premium contributions are made with after tax dollars.
In a Taxable plan the member pays taxes only when benefits are received. This makes taxable plans preferable to members that don’t receive benefits from them.
2) In a nontaxable plan with a fixed percentage of salary benefit schedule the net replacement ratio increases as salary levels increase. This reduces the incentive for to return to work. A tiered benefit schedule reduces this problem.
3) In a nontaxable plan members may want a role in designing the plan because they are paying for it
4) In a nontaxable plan plan members may feel more entitled to receive benefits as they are paying for benefits. However claims adjudication by the insurer can limit this impact.
5) In a taxable plan LTD benefits qualify as earned income for RRSP contribution purposes
2.7 Describe the nonevidence maximum (NEM) as it applies to LTD plans
The NEM is the amount an insurer will cover without evidence of insurability.
If a member is entitled to coverage in excess of the NEM then evidence will be required and subject to underwriter’s review.
2.7.b Explain the Overall Maximum as it relates to LTD
The OM is the maximum amount an insurer will provide and is outlined in the benefit schedule
2.8 Explain the basis for calculating benefit maximums in LTD plans
Usually takes into account the number of individuals to be insured and the average amount of insurance per person.
Each insurer uses its own formula to determine LTD maximums, though results tend to fall within a fairly narrow range.
2.9 Outline the benefits that are usually included as direct offsets in LTD plans (2)
1) benefits payable from government sponsored benefit programs including
a) CPP/QPP disability and
b) WC benefits
2) benefits payable from auto insurance (where permitted by law).
When a plan member receives benefits from these sources the plan becomes the second payer and the amount payable from the plan is reduced
2.10.a Describe what indirect offsets are in the context of LTD plans
Indirect offsets limit income from all named sources to a specified multiple of pre-disability earnings, known as an all source maximum.
These offsets result in a reduction in LTD benefit only if the total income from the plan plus other sources exceeds the all source maximum.
All named sources typically includes direct offsets, indirect offsets and the LTD plan itself
2.10.b List 4 indirect offsets in the context of LTD plans
1) Benefits payable in an association or other group disability program
2) Any income as a result of any job or business for remuneration or profit, excluding severance or vacation pay
3) CPP/QPP disability pension payable to the plan member’s dependents as a result of the member’s disability (some insurers no longer consider this an indirect offset)
4) Any retirement benefits related to any employment (group but not individual RRSPs, Public Service Superannuation, Ontario Municipal Employee Retirement Pension etc.)
2.11 Explain the purpose of all source maximums in LTD plans
To prevent a disabled member’s total income from becoming so close to their pre-disability earnings that they have no incentive to return to work.
If the LTD benefit is taxable the all source maximum is based on a percentage of gross earnings up to 80% or 85%. If non-taxable the percentage is of net income.
3.1 Identify circumstances under which insurers will waive recommencement of the elimination period for LTD under the recurrent disability provision (2)
1) An individual returns to work on a full time basis during the elimination period and becomes totally disabled within 14-30 days due to the same or related disability. The individual is determined to have been continuously disabled and doesn’t have to wait to receive benefits.
2) An individual returns to work on a full time basis following a period of disability and becomes totally disabled within six months due to the same or a related cause. This individual is considered to have been continuously disabled for the purposes of the elimination period.
3.2 Explain the COLA provision in LTD plans
If a disability lasts for more than two years inflation can diminish the value of LTD benefits.
COLA typically provides an indexing of the disability payment based on CPI and not exceeding a stated maximum (usually 3%-5%)
The adjustment is made on an annual basis, typically Jan 1 based on the last 12 monts.
3.3 What is a partial disability provision in the context of LTD plans
Partial disability covers members who are able to work in a limited capacity while receiving LTD.
The provision typically specifies that total income from all sources cannot exceed 100% of pre-disability income.
Eligibility is linked to the definition of total disability in the LTD contract and as such varies widely between insurers.
3.3.b What is a residual disability provision in the context of LTD
Allows a plan member to work in a limited capacity during an elimination period and still have those days count as part of the elimination period.
This lowers plan expenses and can hasten a return to work by members as they have a higher sense of self worth.
In practice residual disability provisions are uncommon and adjudication practices vary widely among insurers.
When offered some insurers look at whether a plan member’s earnings fall below a certain threshold (20% or more loss of monthly earnings due to sickness or injury) while other insurers don’t specify an earnings test.
4.1 Explain the purpose of a preexisting condition provision in an LTD plan
A preexisting condition provision protects against the negative impact of high claims that could result where an individual joins the plan with a preexisting condition.
The provision excludes coverage for any medical condition that existed and for which a plan member received treatment during a specific period
4.1.b What is the most common preexisting condition provision for LTD plans
The most common limitation is 3/12, where benefits aren’t payable for a total disability that commences during the first 12 months of coverage if the disability results from any sickness or injury for which the plan member was treated or attended by a physician or for which prescribed drugs were taken within 90 days prior to the effective date of the individual’s insurance.
4.2 Identify 9 standard limitations and exclusions in LTD plans (9 + 1)
1) any period where a plan member is not under the appropriate care of a physician
2) If the plan member engages in any occupation for remuneration or profit except as approved by the insurer under the partial disability benefit or approved rehabilitation program
3) Any period during which the claimant is receiving EI maternity or parental benefits
4) If the plan member refuses or fails to participate in an approved modified work or rehabilitation program as required by the insurer
5) If the plan member is outside of Canada either permanently or temporarily and such an absence is not approve by the insurer
6) Any period during which the member is confined to a penal institution or correctional facility
7) An intentionally self inflicted injury or attempted suicide while sane or insane
8) War, whether declared or undeclared
9) Participation of or commission of or attempt to commit a criminal offence
Benefits are usually also not payable during strike, leaves of absence or temporary layoff if the disability is commenced after those begin. However the elimination period can be satisfied during those periods.
