Group long-term disability plans are commonly designed to cover 60 percent of an employee’s income up to a maximum monthly benefit, commonly $5,000 per month for example. And that’s often adequate for the majority of employees.
But for key executives, many of whom are earning far more than $100,000 a year, these group policies often provide less than 60 percent coverage. Capping the coverage at a maximum of $5,000 a month means executives are receiving proportionally inferior coverage compared to the rest of the employee population – in many instances even less than 40 percent.
Worse yet, executives may not realize how disadvantaged they’ll be if their only source of income while disabled is the maximum benefit amount.
Doesn’t workers’ comp and Social Security cover disability?
In a word, no.
- Workers’ compensation only covers time away from work if the disabling illness or injury was work-related. In 2016, only one percent of American workers missed work because of an occupational illness or injury.1
- From 2006 to 2015, only 34 percent of Social Security Disability Insurance (SSDI) claimants had their applications approved.2
- The average SSDI benefit as of January 2018 was $1,197 a month.3
- That equates to $14,364 annually — barely above the poverty guideline of $12,140 for a one-person household, and below the guideline of $16,640 for a two-person household.4
Is that any way to recruit and retain executives?
A lot is expected of today’s corporate executives – and they have expectations of their own. One of those is the assumption that they will be rewarded with a strong executive benefits package that includes perks such as deferred compensation, excess liability insurance, life insurance, and more – including a more robust disability program.
Not providing them with disability coverage that, at the very least, brings them into line with the rest of the employee population could prove to be short-sighted in the long run.
Executive Disability policies act as an additional layer of coverage over the existing Group LTD coverage. However, these policies are not simply additional group coverage; they are actual Individual Disability Insurance contracts. This provides several potential advantages. Individual Disability policies can protect more types of compensation such as bonuses and commissions, improve the definition of disability and probability that benefits will be paid, extend the duration that benefits are payable, and provide inflationary protections. These plans are typically designed to provide a tax-free benefit, which provides a greater net benefit to the disabled participant. Additionally, because the policies are owned by the participant, they are fully portable and can be continued by the participant should they separate from service. Lastly, and most importantly, the addition of an Executive Disability program can increase the income replacement protection of your executives to 65 percent, 70 percent or, in some cases 75 percent of their current pre-tax income.
An organization has substantial discretion in determining who it would like to include in its Executive Disability benefit program. Most employers that implement an Executive Disability program will define eligibility based on job title or income. For example; ‘All senior directors and above will be eligible,’ or ‘All employees with annual income of $180,000 and above will be eligible.’ With this flexibility, an employer can precisely target the group they would like to provide this benefit to. When determining eligibility, it is important to note that with as few as three participants, many insurance carriers will offer substantial discounts on the policy premiums. With five or more participants, all policies can usually be issued on a guaranteed basis, meaning no cumbersome medical underwriting requirements and no exclusions due to pre-existing health conditions.
Do executives really need disability insurance?
Arthritis. Cancer. Back pain. Depression. Heart disease. Fractures, sprains, muscle and ligament strains. All of these are significant contributors to making disability insurance not only a smart benefit choice, but one that’s far more valued than many companies realize.
Also, as previously mentioned, many basic plans fail to cover variable pay such as bonus and commission income, which leaves many executives with an even larger gap should they become disabled.
The Social Security Administration estimates that one in four 20-year-olds will become disabled and unable to work before they reach the age of 67. In 2012, more than 650,000 disabled workers received more than $9 billion in long-term disability benefits through employer-sponsored group disability coverage. Just because you’re an executive doesn’t mean you’re immune to some form of disability.
If a highly compensated person becomes disabled, losing a substantial amount of their income can be devastating. Employers can minimize the financial loss for an executive with a long-term disability caused by an accident or illness. Most disabilities result from illnesses, not accidents.
To learn more, contact Marsh & McLennan Agency's Executive Benefits practice to take advantage of our experience and expertise in Wealth Accumulation Plans, Wealth Protection Plans, Risk Protection Plans, Executive Rewards Assessments, and more.
1 Bureau of Labor Statistics, Employer-Reported Workplace Injuries and Illnesses (Annual) 2016, Table1 Incidence rates of nonfatal occupational injuries and illnesses by industry and case types, cases with days away from work
2 Social Security Administration, Annual Statistical Report on the Social Security Disability Insurance Program, 2016 https://www.ssa.gov/policy/docs/statcomps/di_asr/2016/sect04.html Chart 11
3 Social Security Administration, Monthly Statistical Snapshot
https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/#table2 February 2018
4 ASPE, Poverty Guidelines 2018 https://aspe.hhs.gov/povertyguidelines