The Parallels
What are the parallels between losing your job, a pay cut, and becoming disabled?
In today’s economic environment the American worker is financially struggling - more than ever - contributing to stress, anxiety, depression, and lost productivity.
The American worker fears losing his or her job. “Unemployment” won’t pay the bills, especially for the higher income worker.
Similarly, the “able” American worker would be in peril if he or she received a significant cut in pay – say 15%-20%.
That same American worker becomes disabled due to an unexpected health condition or accident and faces a cut in pay that could be as little as 40%, and commonly as deep as 70%-80%.
It does not matter how your paycheck was devastated. It’s all the same. But, unlike the lost job or cut in pay, your Employer can do something about the huge reduction in pay in the event of a disability.
Employers can provide up to 75% Income Protection of Total Compensation, in the event of a long-term disability (LTD).
Most Group LTD plans intend to replace 60% of base salary only. Sixty percent is a superficial percentage adopted by actuaries, insurance companies, employers, and employee benefit consultants years ago.
The original idea behind 60% replacement was to minimize the LTD plan risk by removing any “financial incentive” to file a disability claim. It also minimizes the likelihood of malingering (staying on claim once recovered). The logic does make sense.
But a Group LTD plan that replaces 60% of a disabled employee’s income, results in a 40% pay cut.
Add to the 40% pay cut other common deficiencies found with Group LTD plans, and a disabled employee expecting to see 60% of income replaced by the LTD, might only see 20% to 30% replacement.
Here’s why:
Group LTD plans have benefit maximums, capping the monthly amount payable. Highly compensated employees, including Executives, Physicians, Attorneys, or Investment Bankers, might only receive 10-30% replacement due to the plan maximum.
Employers typically pay the premium for the Group LTD. While this is great, this results in the benefit being taxable as income, at time of claim. An employee expecting to receive 60%, after taxes, would receive 43% assuming a 28% tax bracket.
Bonus compensation is not covered by Group LTD plans 78% of the time. Bonus compensation is becoming a growing part of the American workers compensation package. Protecting bonus compensation in the event of a disability should be a priority for every Employee Benefit Consultant and Human Resource Benefit Professional.
Employer-sponsored Supplemental Disability Insurance (IDI) plans can solve these problems. Supplemental plans can provide 75% income replacement, protect bonus compensation, and increase the monthly benefit maximum.
In the employee benefits world, the large employers tend to be the “pioneers” and early adopters. Insurance companies first introduce new benefits, technology platforms, or initiatives to employers with over 2,000 employees. Over 50% of Fortune 500 Companies, and sixty-eight of the largest law firms (AM Top 100) offer Supplemental Disability Insurance plans, layered on top of the Group LTD.
As such with the strong and growing presence of Supplemental Plans in the larger employer space, this benefit offering is becoming a new and popular benefit in mid to small employer space as well.
