Achieving long-term financial security in a rewarding career is a priority for many and income is a critical component of getting there.
Ninety percent of individuals feel their ability to earn an income is more valuable than their home and personal possessions, medical insurance or savings, according to a study by the Council for Disability Awareness. What would happen to that valued asset—your ability to earn income—if you were unable to work for two and a half years (the average long-term disability claim duration) because of an accident or illness?
In the event of a disability, individuals earning $250,000 annually stand to lose more than $5 million over 20 years. The Social Security Administration estimates one in four will be disabled before retirement. With the risk of a disabling event being three to seven times more likely than death during working years, it is important to review clients’ income protection plans to make sure they provide adequate coverage.
Group long-term disability (LTD) coverage offered through an employer provides basic income protection but often falls short of adequately addressing the needs of highly skilled executives and managers:
• Insured Earnings – Group LTD plans are designed to replace a specific level of earnings if an employee becomes disabled. The most common plan replaces 60 percent of base salary only, which would create an income gap for highly compensated individuals paid through commissions, K-1 distributions or bonus income.
• Maximum Monthly Benefit – Eighty percent of group plans have a maximum benefit of less than $10,000 per month. This means a 60-percent plan protects no more than $200,000 of base salary. An executive earning a $250,000 base salary and an $80,000 bonus is only being insured at 36 percent by a $10,000-per-month plan.
• Taxability of Monthly Benefits Received – Benefits are taxable when premiums are paid by the employer, further reducing the 36 percent of income replacement.
• Benefit Features – Disability definitions in a group LTD plan and the benefits provided are often relatively restrictive. There are also limitations on return-to-work benefits and specific illnesses, and coverage is not portable.
Integrated executive disability plans are designed to address these gaps and provide a more comprehensive plan for protecting the current and future earnings potential of higher-income professionals.
Through an integrated plan approach that utilizes supplemental individual coverage to insure a greater portion of an executive’s compensation, policies contain more comprehensive benefit features, provide additional benefits for more severe disabilities, guarantee premiums to retirement age (fixed premium coverage) and are individually owned (making them portable).
When these policies are purchased through employer sponsorship, they may be available on a guaranteed standard issue basis (no medical underwriting) with significant pricing discounts. The more participants in the integrated plan, the more the guaranteed coverage and lower the premiums.
Greg Hoernschemeyer is principal of Horan Associates, a member firm of M Financial Group.
Tami Barraclough is manager of disability insurance sales support for M Financial Group.
