What happens if one of your top executives becomes disabled?
Will he or she be able to support their families?
Make the mortgage payments?
Keep the kids in college?
By age 65, one in three working Americans will face a disability lasting more than three months1
Unexpected disability can devastate employees, especially highly compensated executives earning $100,000 or more per year, without adequate disability insurance. A Harvard study shows that nearly half of all personal bankruptcies and 48 percent of all mortgage foreclosures stem from illness of injury disabilities.
Employers cover most of the more than two million top executives in the corporate market in 2018, with group disability policies. But there’s an overlooked problem: They cover typically only up to 60 percent of salary during the disability. Sixty percent of what?
Unfortunately, many executives and even those HR managers who communicate benefits believe they’re adequately covered when, in fact, they do not fully understand the limits of their policies.
For instance, total executive compensation will be far greater than salary alone and may include:
- annual and long-term bonuses
- commission income
- partnership distributions
- restricted stock units
- lost deferrals/employer matches
These numbers add up, surpassing the annual salaries of high-earners. For example, one corporation offers a group long-term disability plan, covering 60 percent of salary, but with a monthly benefit cap at $15,000.
Employer-provided group disability plans do begin to help employees weather through an injury or illness. But they do not adequately protect ‘an important class of employee’—senior management and executives. Individual Disability Insurance can fill the gap.
Meet the SVP of Finance, Rachel Warden, who earns $300,000 annually with an annual bonus of $180,000 for total compensation of $40,000 per month. Under her employer’s group disability plan, she’s limited to 37.5 percent coverage versus 60 percent for lower-earning employees—a case of discrimination?
What happens to non-working family members when your executives go without adequate disability insurance? How do they carry the burden of your lost income?
Sell the family home? Move in with relatives? Give up college plans to work instead.
The Life Insurance Market Research Association (LIMRA) says that 70 percent of U.S. households with children under 18 would have trouble meeting everyday living expenses within a few months if a primary wage earner were to die or become incapacitated.
Executives are no more immune to illness and injury than anyone else. What’s more, top-income earners can just as easily fall into a living-paycheck-to-paycheck syndrome. And have. It’s all relative.
Mandate for the Underinsured
Group disability policies leave most high-income earners underinsured. If your full income power is worth $40,000 a month, how will you live disabled on $5,000 a month? See charts below:
Look at the difference with an additional (individual) disability policy.
As an employer, ask yourself the question your executives ask:
Can I replace a year of lost earnings if I’m disabled?
As CEO or business owner, can you?
Some of the executive population mistakenly believe that worker’s comp and social security disability insurance (SSDI) will cover a work-related illness or disability. In 2016, only one percent of American workers ever missed work due to illness or injury, so small as to not create a ripple. Besides, SSDI only approved 34 percent of all claimant applications from 2006 to 2015, leaving the plurality of need unmet.
Quick Tutorial on Disability Insurance
Executive disability policies supplement typical group policies by adding a critical layer of well-defined, extra income coverage. They can:
- cover more types of compensation
- better define disability and likelihood benefits payout
- extend the duration of benefits payments
- provide a hedge against inflation
Remember, policies are usually designed to provide a tax-free disability benefit, as such, a larger net benefit to the disabled participant. Your executive owns the policy. It’s also portable and extendable beyond the executive’s separation from service.
Many factors influence the cost of premiums for supplemental or individual disability income insurance. Generally, premiums may range between 1.5 and three percent of the executive’s gross income.
Age, gender, smoking, and the carrier’s claim experience all affect the premium price. Pre-existing health conditions are acceptable; they may add 25 to 100 percent to policy cost to cover added risk.
Many carriers provide plans that carry a DI benefit period payment maximum of two-, three-, five- and 10-year. Once again, the price increases to purchase an extended benefit period.
Disability policies stipulate a waiting or elimination period before eligibility for benefits payment which may require a 30 – 45 day wait period before the first benefit processes.
Benefits to Employer, Business Owner, and the C-Suite
With supplemental disability insurance, you do not have to choose between doing the right thing and doing the smart thing. You can do both.
Due to employers’ flexibility in determining eligibility, you can target with precision which group you want to benefit. Some call this an executive carve-out, where you separate those valuable contributors to the bottom line from those valuable contributors without line responsibility.
Best of all, as few as three participants can still earn substantial carrier discounts. Up to five participants, you may even warrant guaranteed issue, forgo painful medical underwriting, and no exclusions on pre-existing health conditions. Now that’s doing the right thing.
With IDI, you will increase the income replacement protection of your executives from the net 37.5 percent now to up to 75 percent of participants’ current pre-tax income. Talk about a glue-in-the-seat strategy right when the war for top talent rages on in most all vertical markets.
Let’s briefly address the issue of taxes and how it affects employers:
At Henehan, we never want to see you or your executives ill or disabled. But chances are, sometime in your lifetime, we will.
So, when was the last time you reviewed your disability policies, group or individual?
Please allow our insurance professionals to audit your current group disability policies. We can fill the coverage gaps for yourself, your highly compensated and, perhaps, save you money on premiums.[This is the first post in a series on supplemental executive benefits. Next, group life insurance.]
To your life well-lived,
Joseph E. Henehan, president and chief executive officer
The Henehan Company