An interesting problem develops when a termination of an employee involves a severance package and part of that package is the requirement to continue certain employee benefits such as their Long Term Disability Insurance. The human resource departments often times get these calls and panic when they realize they cannot perform as promised since they can no longer keep the terminated employee on the group LTD plan. Securing an individual plan is not available option since the person is currently unemployed.
From the firm’s perspective: This situation has now placed the firm at risk for a significant liability should the terminated employee become disabled. The firm would have to fund the disability benefits themselves and this could be into the hundreds of thousands or even millions of dollars. The firm would have to book this liability as if the benefit will be fully payable.
From the terminated employees perspective: While an individual is between jobs, the need for disability insurance continues to be very important. This may sound contrary to logical thinking, but consider the consequences of having a disability during unemployment. How will they continue to run their household, pay the mortgage, medical bills, etc?
To make matters worse, the disabled worker most likely now has a pre-existing medical condition which would preclude them from being able to purchase an individual policy. The medical condition or physical limitation could also cause potential employers to deny employment leaving the individual with few options.
The solution is a severance disability policy to help cover this risk.