Health, Disability, and Life Insurance Plans

Employers might offer medical and dental plans, disability benefits, and life insurance.

Medical and Dental Plans A serious illness or injury can be devastating to an employee and his or her family. It can threaten their emotional and economic well-being. Thus, adequate health insurance is important to employees and is part of a solid group plan.

Group health plans help attract and keep employees who can make your business a success. They relieve your employees of the anxiety of health care costs by providing the care they need before illness becomes disabling, thus helping you avoid costly employee sick days.

Group health plans usually cost less than purchasing several individual policies with comparable coverage. Moreover, there are tax advantages to offering health care benefits: your contribution as an employer may be deductible and the insurance is not taxable income to your employees.

As an employer, you can choose either an insured (also known as an indemnity or fee-for-service plan) or a pre-paid plan (also known as a health maintenance organization).

Traditional Indemnity Plans.  An indemnity plan allows the employee to choose his or her own physician. The employee typically pays for the medical care and then files a claim form with the insurance company for reimbursement. These plans use deductibles and coinsurance as well. A deductible is a fixed amount of medical expenses an employee pays before the insurance plan reimburses any more expenses. The deductible can range from $100 to $1,000 a year. Coinsurance is a percentage of medical expenses the employee pays, with the plan paying the remaining portion. A typical coinsurance amount is 20%, with the plan paying 80% of approved medical expenses. Listed below are the most common types of insurance arrangements (indemnity plans) providing health care to groups of employees.   
    • A basic health insurance plan, covering hospitalization, surgery and physicians' care in the hospital.
    • A major medical insurance plan, usually supplementing a basic plan by reimbursing charges not paid by that plan.
    • A comprehensive plan, covering both hospital and medical care with one common deductible and coinsurance feature.
Health Maintenance Organizations. Health maintenance organizations (HMOs) provide health care for their members through a network of hospitals and physicians.  Comprehensive benefits typically include preventive care, such as physical examinations, well baby care and immunizations, and stop-smoking and weight control programs.

The main characteristics of HMOs are as follows:  
      • The choice of primary care providers is limited to one physician within a network; however, there is frequently a wide choice for the primary care physician.
      • There is no coverage outside the HMO network of hospitals and physicians.
      • Costs are lower, due to limited choice. Physicians are encouraged to keep patients healthy; accordingly, they often are paid on a per capita basis, regardless of how much care the patient needs.
      • The employer prepays HMO premiums on a fixed, per-employee basis.
      • Employees do not have to apply for reimbursement of charges, but they may have small co-payments for medical services.
    Preferred Provider Organizations. Preferred provider organizations (PPOs) fall between the conventional insurance and health maintenance organizations, and are offered by conventional insurance underwriters. A PPO is a network of physicians and/or hospitals that contracts with a health insurer or employer to provide health care to employees at predetermined discounted rates. 

    Some of the key elements of a PPO are:  
      • It offers a broad choice of health care providers. Because of the broader choice of providers, PPOs are more expensive than HMOs.
      • It may have less comprehensive benefits than HMOs, but the benefits usually can meet almost any need.
      • PPO providers usually collect payments directly from insurers.
    Although there is no requirement for employees to use the PPO providers, there are strong financial reasons to do so.

    Dental Benefits. Medical insurance frequently includes dental plans. Most plans cover all or portions of the cost for the following services:  
      • Cleaning, x-rays and oral examinations.
      • Fillings.
      • Crowns and dentures.
      • Root canals.
      • Oral surgery.
      • Orthodontia (these portion of the cost covered here are generally quite limited, if at all)
    Health Savings Accounts. The HSA allows employees to deduct contributions to the HSA even if they do not itemize deductions. The HSA plan allows employees who are covered by a high-deductible health plan to contribute pre-tax amounts that will be used to cover medical expenses or used later for retirement. Qualified amounts contributed to an employee's HSA by an employer can be excluded by the employee. Distributions from the HSA are not taxable as long as they are used for medical expenses.

    Disability Benefits A disability plan provides income replacement for the employee who cannot work due to illness or accident. These plans are either short-term or long-term.  They can be distinct from workers' compensation because they pay benefits for non-work-related illness or injury.  
      • Short-Term Disability.A short-term disability is usually defined as an employee's inability to perform the duties of his or her normal occupation. Benefits may begin on the first or the eighth day of disability and are usually paid for a maximum of 26 weeks. The employee's salary determines the benefit level, ranging from 60 to 80% of pay. You, as an employer, may specify a number of days of sick leave paid at 100% of salary. The employee can use these before short-term disability begins.
      • Long-Term Disability.Long-term disability (LTD) benefits usually begin after short-term benefits conclude. LTD benefits continue for the length of the disability or until normal retirement. Again, benefit levels are a percentage of the employee's pay, usually between 60 and 80%. Social Security disability frequently offsets employer-provided LTD benefits. Thus, if an employee qualifies for Social Security disability benefits, these are deducted from benefits paid by the employer.
    Life Insurance Traditionally, life insurance pays death benefits to beneficiaries of employees who die during their working years. There are two main types of life insurance:  
      • Survivor income plans, which make regular payments to survivors.
      • Group life insurance plans, which normally make lump-sum payments to specified beneficiaries.
    Protection provided by one-year, renewable, group term life insurance, with no cash surrender value or paid-up insurance benefit, is very popular. Frequently, health insurance programs offer this coverage. 

    You should use the same principles for selecting a life insurance program as you do for selecting health insurance. Finding a benefit plan that meets your budget constraints and fills the needs of your employees is crucial. Among the sources to check are: 
      • Your local chamber of commerce.
      • Independent insurance agents.
      • Trade associations of your business.
      • State departments (or commissions) of insurance.
      • Community business leaders.
      • Benefit consultants or actuaries.
      • Service Corps of Retired Executives (SCORE) (affiliated with the U.S. Small Business Administration).
    The plan may be administered directly by the company or through an administrative services contract.