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Are Your Employees Getting The Maximum Life & Disability Coverage?

Continuing our discussion of the effects of salary increases on employee benefit coverage, we discuss two important factors that impact the level of life & disability coverage your employees can receive: Non Evidence Maximums (NEM) and Health Evidence Maximums (HEM).

NEM stands for “Non Evidence Maximum” which is a term that applies to the insurance type benefits such Life, AD&D, STD and LTD. The NEM guarantees each employee a minimum amount of Life, AD&D, STD, and LTD coverage without any medical questions or tests. HEM stands for “Health Evidence Maximum” which is the maximum amount of Life, AD&D, STD and LTD coverage an employee can obtain only after submitting a medical questionnaire and it being approved by the insurance carrier. Simply put the NEM is the guaranteed minimum an employee can be covered for regardless of their health, while the HEM is the maximum that an employee is entitled to after being approved.

Life & Disability benefit coverages range considerably if your employees are covered by either NEM & HEM. The most important aspect of NEM vs HEM is that in order for an employee to qualify for the maximum amount (HEM) they must apply for this prior to any health situation arising. In other words, an employee who is only insured up to the NEM and all of a sudden becomes disabled and tries to apply for the HEM at that time, will be declined. Some employers have misunderstood the HEM to mean, that at the point when an employee becomes disabled is when the health questionnaire is to be completed and sent to the insurance carrier. Mistakenly some employers believed that this would satisfy the HEM requirement. This is incorrect, and the best analogy to illustrate this point would be to home fire insurance as the house is burning down. No insurance company would ever approve this coverage because the house is already on fire. Therefore, no insurance company would approve to pay a higher amount of insurance to an employee if that employee is already disabled. Employees need to apply for this coverage in advance before health issues arise.

Employees do not have to apply for the HEM amount if they do not want to, they can remain at the NEM amount. The employer just needs to make them aware that they have the opportunity now while they are able and that opportunity will not be available should something unfortunate occur as described above. Please see below how NEM vs HEM comes into play on a typical benefit plan.

Typical Plan Design

Life Insurance 1 x annual income NEM $ 50,000 HEM $ 100,000
AD&D 1 x annual income NEM $ 50,000 HEM $ 100,000
LTD 66.67% of income to $6,000 maximum monthly NEM $ 3,000 HEM $ 7,000

Employee A earning $100,000 would automatically receive $50,000 in Life and AD&D coverage and $3,000 in LTD coverage which is guaranteed up to the NEM.

IF Employee A were to apply and be approved for the HEM the following would occur:
Life Insurance and AD&D coverage would now be $100,000 and the LTD coverage would be $5,556 per month.

Employee A  annual income is $100,000
Life insurance is 1 x annual income = $100,000
AD&D is 1 x annual income = $100,000
LTD is 66.67% of income to a $7,000 monthly maximum.
$100,000 x 66.67% / 12 months = $5,556 monthly LTD benefit.

As you can see all of the coverages would be increased and the employee is receiving their maximum amounts. The above examples are some of the pitfalls that plan administrators need to watch out for. We recommend that at least once a year, employees should be reminded of this opportunity to apply for higher coverage and employers should document that they have informed employees of this benefit.