The 60% Replacement Dilemma

The 60% Replacement Dilemma:

Do you have highly compensated Employees or Executives? Most likely they are not receiving 60% replacement that the Group LTD plan provides, due to the plan benefit maximum or uncovered compensation.

You have some options:

1.       Do nothing.  Think about how this impacts your ability to attract and retain.  More importantly, the impact to employee moral when a well-respected colleague becomes disabled and receives 20-30% income replacement.

2.       Self-insure income not protected due to the Group LTD benefit maximum or uncovered forms of compensation, such as bonus income.  Be sure to formal written salary continuation plan establishing under what criteria the company will pay, how much, and for how long.  Understand the impact self-insuring/self-funding even a portion of a claim will have on the Company’s balance sheet.  There are accounting rules that must be followed (FASB 112).

3.       Increase the Group LTD maximum.  This is not always an option, and often, not the best option.  Insurance carriers typically underwrite for modest plan maximums, to minimize the plans risk and help keep premium down.  The higher the benefit max, the riskier the plan; and the higher maximum can come with a big price tag.  Most insurance companies will limit the maximum to $10,000/month, exceeding this amount by exception or reserve higher maximums for larger employers.  Larger employers that might have a higher benefit maximum, should be cognizant of how their claims experience and higher reserves because of the higher maximums, impact future renewal pricing. Regardless of the Group LTD maximum, there’s still a good chance that some highly compensated employees still won’t be adequately protected by the LTD plan.

4.       Insure the coverage gaps, with a Supplemental Income Protection plan.  Coverage can be employer-paid or voluntary, and generally costs less than 1% of payroll.  Insuring the gaps in coverage minimizes the Company’s financial and legal risk, improves employee morale in the event of a disability, and helps attract and retain top talent.  For larger employers where claims experience and reserve exposure impacts future plan pricing, Supplemental Income Protection plans can help spread the risk.  Supplemental Income Protection plans generally leverage a fixed premium, and the claims experience (and therefore reserves), do not impact the Group LTD plan experience. 

Supplemental IDI plans can address the gaps in Group LTD coverage levels, and typically cost less than 1% of compensation.