Severance Agreement Disability Insurance

When the termination of an employee places a benefits liability on the employer

• Change of Control
• Downsizing
• Golden Parachutes

An interesting problem develops when the termination of an employee involves a severance package and part of that package is the requirement to continue certain benefits for a set period of time. The toughest of these promises is the replacement of the Group Long Term Disability plan. Many Long Term Disability plans do not have a portability provision and those that do are usually limited to very modest amounts of benefits, less than what is called for in the severance agreement. Once the severed employee comes off the payroll, he or she is no longer covered under a Long Term Disability plan.

HR Departments panic when they realize they can no longer keep the terminated employee on the group Long Term Disability plan and unfortunately, securing an individual plan is not usually an available option since the person is now currently unemployed.

The severance agreement usually stipulates that there is to be continuation of the employee's benefits. The Long Term Disability plan is not segregated and in the event the severed employee was to become disabled, the funding of the disability benefits becomes the employer's liability. Not only must the employer show this on the books as a liability, but the employer must also finance it through cash flow, unless insurance can be secured to remove that risk from the employer.

When an individual becomes unemployed, the need for disability insurance not only continues to be important, but arguably becomes even more important. Consider the consequences of suffering a disability during a period of unemployment. If he or she cannot recover, finding a new job will be impossible. If recovery is not 100% and leaves some residual issues, the chances of securing employment with a pre-existing condition or a physical limitation is generally reduced.