Welcome to ThreeFlow's benefit breakdown series, where we dive into the details of a coverage and discuss the most recent trends with the help of ThreeFlow's data and benefits experts.

We talked with underwriting consultants Jessie Kauffman and Kyle Morrison to help us break down long-term disability (LTD). With over 15 years of combined experience as underwriters, they are well-versed in the nuances of LTD coverage and options.

LTD provides financial benefits to employees who cannot work due to an accident, illness, or injury. However, what constitutes a disability to work or earn differs between policies.

How do LTD policies define a disability?

There are three major definitions of disability in LTD policies: 'and,' 'or,' and 'duties only.'

  • 'And' definitions require both a loss in earnings and duties to be considered disabled.
  • 'Or' definitions allow you to be considered disabled from a loss in earnings or just a loss in duties.
  • A 'duties only' definition is the most simple definition, and carriers that use it probably assume that a loss in duties comes from a loss in earnings.

Looking at ThreeFlow's data, which definition are carriers using more often?

Our data shows that most carriers, around 85%, are quoting and selling 'and' definitions of disability. An 'and' definition is typically standard for most carriers as it sets a higher threshold to be considered disabled, which helps with claims management.

Only around 7% of carriers use the 'or' definition. This definition should be considered for classes of employees that may not be working due to a disability but still generating earnings, or when an employee may be able to work, but their earnings require time to build back to pre-disability levels.

Most insurance carriers want to manage claims efficiently and mitigate risk as much as possible. An 'and' definition of disability accomplishes this over an 'or' definition, hence why we often see that. 'Or' definitions can be appropriate under the right circumstances based on the industry or occupations of the insured group, but underwriters need to price accordingly.

Where does the earnings test come into play?

The earnings test is an essential part of the definition of disability. One of the main goals of a long-term disability contract is to get a claimant to return to work. The earnings test not only helps to define what 'disabled' means but also helps to incentivize claimants to return to work and get off of disability.

For example, if an earnings loss is required to be disabled, there will be a specified percentage as to what the loss has to be. This can vary from 60% to 99%. It's essential to specify this loss to have consistency and help with claims management.

What does ThreeFlow's data show regarding the earnings test?

We're seeing that an 80% earnings test requirement is the most common. A less popular choice is a 99% earnings test requirement. A 99% earnings loss presents some concerns since it allows employees to receive their pre-disability earnings and may cause challenges to get employees to return to work.

What other factors should be taken into account when choosing an LTD policy?

Every carrier has a standard offering of how benefits will be paid if an insured individual can work, but not at their normal capacity. These offerings usually fall into one or more of these Partial Disability Formulas:

  • 50% offset
  • Proportionate loss
  • Progressive partial

Progressive partial is the most beneficial to a claimant as it will allow them to earn up to 100% of their pre-disability earnings for the entirety of their disability claim.

However, it can present return-to-work challenges for employers and carriers since it allows claimants to receive 100% of their pre-disability earnings. A combination of a 12-month return-to-work incentive benefit and either a proportionate loss (also known as prop loss) or 50% offset formula is a more robust combination since it manages the risk of employees not coming off disability.    

There also exist other more specific, custom formulas deriving from these three popular formulas.

What does ThreeFlow's data show on the Partial Disability Formula?

Prop loss is the most common as the formula calculation tends to be a middle-of-the-road payment vs. a more rich progressive partial or (typically) a less rich, 50% offset.

A prop loss and 50% offset combination can be more potent formulas because depending on an employee's pre-disability earnings, one of the definitions will be stronger than the other. Generally speaking, prop loss will benefit higher earners, and a 50% offset will benefit lower earnings.

For high earners especially, the difference between a progressive partial formula and a prop loss formula could mean the difference of thousands of dollars a month.

Underwriters should know the partial disability formula and leverage contract differences to justify higher rates. Or the inverse, if the covered population are primarily low to average earners, a richer formula won't have as much impact.

Insurance companies want to mitigate risk and manage claims as best they can. Quoting and selling prop loss contracts allows the insurance company to do just that while still offering reasonable and acceptable benefits to an insured individual.


Want to learn more about ThreeFlow's underwriting consulting capabilities? Request a demo today. And stay tuned for more of our Benefit Breakdown series, where we'll dive into a particular line of coverage and discuss what ThreeFlow's data shows on trends.

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