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Producer Connection is The Standard Life Insurance Company of New York's quarterly online newsletter for Employee Benefits producers.
Sign up to receive Producer Connection
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).