Are you and your most valuable employees really protected if they become disabled?
MIND THE GAP
For many highly paid executives, there is a significant gap between their total compensation and the benefit they receive from their company’s Long Term Disability plan. There are at least three areas that could lead to a significant income shortfall.
Group LTD Benefits Are Capped
Most group LTD Plans have a monthly cap on how much they will pay out if the employee becomes disabled. That cap is typically $5,000 to $10,000 per month.
Benefit is Calculated on Salary, Not Total Compensation
Most group LTD plans do not cover bonus or incentive compensation. It’s not unusual for salary to represent less than half of a senior executive’s total compensation.
Employer Paid Benefits Are Taxable
If the plan is employer-paid, the employer is paying for the premium, so the benefit becomes taxable. That means the percentage of income the executive thought would be replaced is actually a lot less.
IT’S MORE COMMON THAN YOU THINK
The chances of becoming disabled during your career are three to five times greater than death, even though most Americans are better prepared financially for death than becoming disabled.
In fact, 40% of all 45-year olds will suffer a disability lasting longer than 90 days prior to age 65. Once disabled for at least 90 days, there is a 74% chance the disability will last two more years, and a 58% chance it will last five years or longer. 1
According the Council for Disability Awareness, the five most common reasons for long term disability are very familiar to us all:
1. Musculoskeletal – muscle, joint and back problems
2. Cardiovascular – circulatory disease, heart disease and heart attack
3. Mental disorders – depression, anxiety, OCD and substance abuse
4. Cancer – including cancer treatment
5. Injuries – resulting from accidents
INDIVIDUAL DISABILITY INSURANCE
Individual Disability Insurance (IDI) is designed to help offset the loss of income following a disabling accident or illness. It complements the group LTD coverage and can be used to help bring the highly compensated executives back up to full income replacement.
Individual disability plans cover many types of compensation, including bonuses, incentives, and commission. Because the pays, the benefits are not taxable, and they are not offset by Workers’ Compensation or Social Security Disability Insurance payments. And unlike many LTD policies, most IDI policies do not exclude preexisting conditions if the insured has been actively working for 180 days prior to applying for coverage.
Individual disability policies are owned by the individual. That means that once the policy is issued it cannot be cancelled, the rates are locked in for the life of the policy and it follows the executive if they leave their job.
A disability can occur at any time, the probability of which increases with age. A disabling event often coincides with peak earning years when individuals are funding their retirement goals. Disability income insurance provides income replacement, protecting future earnings.
Rick Thomas is Chief Executive Officer of Thomas Financial, a financial services agency that provides life insurance, retirement planning, wealth management, and employee benefits to high net worth individuals and businesses. After graduating from the University of Tampa in 1972, Rick became a Top of the Table member of the Million Dollar Round Table, an elite organization recognized as the standard of excellence for financial services professionals. Rick is Chairman Emeritus of the Board of Trustees of the University of Tampa and supports a variety of civic and charitable organizations. To contact Rick, please call (813) 273-9416 or email [email protected] Disclosure: Securities and investment advisory services offered through M Holdings Securities, Inc., a registered Broker/Dealer and investment advisor. Member FINRA/SIPC. Thomas Financial is independently owned and operated.