Most employers try to hire the best employees. Employers make a significant investment in training new hires with the hope they will make positive contributions to the company for many years to come.

Sometimes, however, this plan is derailed by disability. According to the Society of Actuaries, one out of seven employees will suffer a 5-year or longer period of disability before age 65. The probability of a 35-year-old employee experiencing a 3-month or longer disability is 50 percent.

How can you minimize the draining effect of disability on your company and its employees? One way is to offer disability insurance (sometimes called group insurance), while another is to advise employees about what they need to do to protect themselves.

Why Offer Disability Insurance?

By law, U.S. companies aren't required to offer disability insurance benefits. Why, then, should your company offer this coverage? We offer some reasons:

• If your competitors offer disability benefits, your company should, too, because you want to attract and retain the best employees.
• The greatest asset of most Americans is the ability to earn a living, yet most have savings to cover only 6 months of living expenses.
• The income-earning ability of employees needs to be insured far more than their homes, cars or other tangible goods.
• Disability is unpredictable, and employers can't eliminate the risk of many common disabilities, including cancer, back problems, diabetes, heart disease and accidents.

Negotiate More Bang for the Buck

Once you decide to offer disability insurance, how can you be sure the coverage you choose will provide the protection you and your employees need? Let's look at the essentials for providing the best coverage.

Adequate income protection. Policies use a variety of definitions of disability. Some policies state "an employee is considered disabled if he or she is unable to do any occupation." But this is a waste of money, because a policy that pays only if an individual can't do any occupation is no insurance at all. With this kind of policy, an engineer, for example, will not be paid any benefits if, after a disability, he or she can stuff envelopes or other type of minimum-wage job. This is not income protection.

Negotiate for a policy with an "own occupation" clause that pays benefits if the employee cannot do the job he or she was educated and trained to do. Employees also should look for "residual benefit" clauses that make up for any loss of income if they can do some type of work but still suffer a loss of income. A residual benefit clause, if truly honored by the insurer, offers a win-win benefit for all three parties: If the disabled employee returns to the workforce in a lesser earning capacity, his lost income will be partially replaced by the policy; payouts for the insurer will be reduced; and the employer will retain a good employee.

Job retraining assistance and workplace modification payments. Negotiate for a policy that motivates and helps the employee rebuild his or her life after a disability. It is in everyone's best interest for employees with disabilities to become as financially self-sufficient as possible and for the company not to lose its investment in these employees.

Tax protection. Taxes can reduce monthly disability checks by 40%. If premiums are paid by the employee, benefits will not be taxable to him or her; if paid by the employer, the employee will pay taxes on benefits. Set up a plan where employees pay the premiums so they won't have to pay taxes when they need disability funds.

Adequate duration of coverage. Employers may opt to offer short-term and long-term disability coverage. For someone who is severely disabled, a long-term policy that pays only for a limited time, such as 2 years, offers little protection. Negotiate long-term policies that pay benefits up to age 65 or retirement age under Social Security.

No "differential review standard." If you aren't an attorney who specializes in employer-sponsored disability insurance cases, these words may not be meaningful to you, but to the courts and the claimant in ERISA-governed disability insurance disputes, these words make a world of difference in the type of consideration the case will receive.

ERISA preempts (prohibits) the employee from justice system rights, including state court appeals, jury trials, awards of punitive damages, actual damages and, in most cases, attorney fees in disability insurance disputes. Therefore, insurers have nothing to lose if they renege on their policies.

With a policy that specifies a differential review standard, in disputes that escalate to the federal courts, the judge will not look at the facts of the case but merely determine if the insurer had some basis for denying or canceling benefits to the claimant. Any trumped-up reason can suffice. Negotiate to keep the "differential review standard" out of the policy your company purchases so your employees retain rights to complete reviews of their cases by the federal courts, if necessary.

Teach Your Employees to Protect Themselves

Education is the key to minimizing the impact of disability on your company and its employees. Here's a checklist of ideas:

• Distribute a copy of the actual disability policy to employees. Surprisingly, many company executives and HR managers have never seen a copy of the actual policy themselves. Employees need to know the definition of disability, how predisability is calculated per the policy (including the fact that commissions and bonuses may not be included), what percentage of predisability earnings will be paid, how long benefits will be paid, what types of disabilities are excluded and what other limitations in the policy might be.
• Educate your employees about disability statistics. If your company offers different levels of coverage, such as 40% and 60% of earnings coverage, emphasize the advantages to your employees of having the extra coverage for what is typically a minimal extra cost.
• Educate your employees about each type of disability coverage and the inherent gaps in each. Worker's comp, for example, covers only on-the-job injuries and illnesses; it doesn't cover all employees or injuries (e.g., it doesn't cover contract workers or injuries incurred while commuting).

Social Security Disability Insurance (SSDI) benefits require claimants to have contributed sufficiently to the Social Security trust fund (typically for at least 10 years) and to prove that they are unable to perform any jobs that exist in the U.S. economy.

More than half of the people who apply for Social Security disability are denied coverage and, if approved, the payment amounts of $500 to $2,000 per month may be inadequate. Social Security does not provide the disability safety net most employees expect.

Employer-sponsored disability insurance plans provide 24/7 protection, but unlike COBRA medical benefits, coverage terminates when an employee leaves the company. Also, as a result of policy limitations and ERISA legal recourse restrictions, this insurance may not pay as much or as long as employees expect.

A private disability insurance policy provides the most dependable, long-term protection possible because it offers complete legal recourse if the insurer reneges on its policy terms. However, a private policy must be purchased while the employee is still healthy.

The Bottom Line

Disability insurance is far more valuable than most employers or employees realize, and educating your employees is essential. While you want to provide income protection for employees who suffer a severe disability, it is just as important to inform employees with lesser disabilities of all of their options before they choose to go out on disability leave.

Since disability can strike without warning, it's essential for you, your company and its employees to be prepared ahead of time.

Freelance writers Jeanne Lazo, MBA, and Carol J. Amato, MA, are the authors of Persistence is Power! A Real-World Guide for the Newly Disabled Employee. Visit www.disabilitybook.com for more information.