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Producer Connection is Standard Insurance Company's quarterly online newsletter for Employee Benefits producers.
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what you think of Producer Connection and how we can make it better.
It's easy to confuse the concepts of indexing presidisability earnings and cost-of-living adjustments (COLA). When discussing these two similar concepts with clients, keep these basic differences in mind: Predisability earnings are "indexed," or adjusted for purposes of calculating Long Term Disability (LTD) insurance benefits and determining benefit eligibility. COLAs are added to a disabled employee’s net LTD benefit.
Indexed predisability earnings are used, among other things, to calculate how much of a claimant's return-towork earnings may be deductible or the minimum loss of earnings a claimant must suffer to be entitled to an LTD benefit. Let's look at an example of how indexing is used to adjust the minimum amount a claimant must be capable of earning to perform any occupation:
John Doe became disabled in May 2004. His monthly predisability earnings were $1,650. Most LTD policies call for indexing earnings using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to determine how much he must be capable of earning to perform any occupation. The CPI-W increased 15.2% from May 2004 to May 2008 (see table), bringing Mr. Doe’s indexed predisability earnings to $1,900.80. If Mr. Doe's earnings were not indexed, inflation alone could eventually make him ineligible for an LTD benefit.
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Assuming Mr. Doe is covered by a typical 60% LTD policy and he received no deductible income, his net LTD would be $990 ($1,650 x 60% = $990). If his employer’s policy includes a COLA provision that provides for a 4.5% COLA based on the change in CPI-W from May 2007 to May 2008, he would receive a COLA of $44.55 in addition to his $990 LTD benefit, bringing his adjusted LTD benefit to $1,034.55 ($990 x 1.045 = $1,034.55).