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Employer-Sponsored Disability Insurance and Life Insurance McGraw-Hill/Irwin Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6

6-3 LEARNING OBJECTIVES Disability and life insurance concepts Origins of disability and life insurance programs Short-term and long-term disability Types of life insurance

6-4 DISABILITY INSURANCE Short - Term –Last Less Than 6 Months –Disability is an Inability to Perform Any of Occupation’s Duties Long - Term –Lasts Over 6 Months –Disability is an Inability to Perform Work Qualified For (Training, Education, Experience)

COVERAGE 69% of Private - Sector Employees –39% Have Short - Term –30% Have Long - Term Full - Time Employees –46% Have Short - Term –38% Have Long - Term Part - Time Employees –13% Have Short - Term

6-6 SHORT - TERM DISABILITY Pays 50% - 67% of Pre-Tax Salary Benefits for 6 Months Waiting Periods –Preeligibility –Elimination Exclusion Provisions –Self - Inflicted Wounds –Chemical Dependency

6-7 LONG - TERM DISABILITY 50% - 70% of Pre - Tax Salary Months Waiting Period Activated after Short - Term Benefits Expires Waiting Periods –Preeligibility –Elimination Preexisting Conditions Clause Exclusion Clause

6-8 FUNDING DISABILITY INSURANCE Independent insurance companies Partial self-funding Total self-funding

6-9 TAX OBLIGATIONS IRS Code for Accident & Health Insurance Plans Employers Deduct as Business Expense FICA & FUTA for First 6 Months

6-10 EMPLOYER FICA & FUTA EXEMPTIONS Income after 6 (FICA only) Workers’ Compensation Payments Disability Benefits after Worker -Initiated Termination Employee’s Eligible for Social Security Disability Benefits

6-11 RELEVANT LAWS Age Discrimination in Employment Act of 1967 Americans with Disabilities Act of 1990 Employee Retirement Income Security Act of 1974 Workers’ Compensation and Social Security Regulations

6-12 ADEA Provides safe harbor for employees with disabilities occurring below age 60 Older Workers Benefit Protection Act (1990)

6-13 ADA Prohibits discriminatory employment practices against individuals with disabilities EEOA enforces ADA and oversees violation criteria

6-14 ERISA Regulates Benefits Practices Disability Insurance Health Insurance Life Insurance Pensions Titles I, II, III Apply to Non – Pension Benefits

6-15 STATE WORKERS’ COMPENSATION AND SOCIAL SECURITY DISABILITY REGULATIONS Employees may receive long-term disability benefits from public as well as company sponsored disability programs Companies and insurance companies may include an offset provision to reduce benefits from workers’ compensation

6-16 TWO INTEGRATION APPROACHES Full Integration –Company Payments Reduced by Public Disability Amounts Dual - Percentage –For Employees Without Public Benefits –For Employees With Public Benefits

6-17 LIFE INSURANCE Coverage –62% of Full - Time Employees –11% of Part - Time Employees Costs –Manufacturing Industry $120 Per –Non - Manufacturing $83.20 Per

6-18 LIFE INSURANCE Term – Most Company-Sponsored Plans – Specific Termination Date – Payments Only for Death Whole – Policy Always Pays Off – More Expensive

6-19 GROUP TERM LIFE INSURANCE Contributory –Employee Pays All or Part of Premium Noncontributory –Employer Pays Entire Premium –Employers Gets Higher Tax Benefits

6-20 TAX TREATMENT GROUP LIFE INSURANCE Employer can Deduct Premium as a Business Expense Employer CANNOT be Beneficiary Employee Pays Taxes on Coverage Above $50,000 Subject to IRC Section 79

6-21 UNIVERSAL LIFE INSURANCE Combines features of term life insurance and whole life insurance Created to provide more flexibility by allowing the policy owner to shift money between insurance and savings components of the policy Insurance company initially breaks down premium into insurance and savings Policy owner makes adjustments to the amounts directed at each Permits the cash value of investment to grow at a variable rate tied to market Leads to changes in premium, benefits, and payment schedules