How Group and Individual Disability Insurance Lowers Risk and Costs For Employers
Employers offering group Long Term Disability (LTD) insurance protection have a dilemma: provide sufficient income replacement for highly paid staff without raising both risk and cost.
The solution can be surprisingly simple.
Start supplementing your group LTD plan with individual disability insurance. This offers an optimal method of diversifying risk, enhancing benefits, and lowering future expenses. Combining group LTD coverage with individual income protection allows you to balance risk and help both employers and employees, especially high earners.
Diversification reduces risk
Offering individual disability insurance lets employers lower the benefit maximum on group LTD plans, thereby reducing the impact of claims from highly paid personnel.
• Lowering employer risk: Individual plans aren’t affected by group experience or pricing; therefore, exposure to others’ claims is eliminated . This has the effect of stabilizing rates over the long run for both group LTD and individual disability.
• Increasing rate stability: Group LTD premiums can rise during renewal time depending on plan experience; however, individual disability premiums won’t go up until age 65 since rates are fixed and non-cancellable.
• Value-added benefits: Income protection benefits for highly paid employees are enhanced when equity in the plan is maintained.
Lowering long-term costs for employers
Employers can lower their costs by offering individual disability insurance. The benefits cap gets lowered when group LTD plans are supplemented with individual income protection. This produces a stop-loss effect, which isolates the possible impact of a high-income earner’s claim on the group LTD plan. That part of the risk gets shifted to the individual disability insurance carrier, leaving the group LTD plan unaffected.
Your individual disability insurance carrier may also be able to offer additional coverage (which might be needed by top employees earning over $500K per year). Although individual disability policies are more expensive than group packages, they provide greater coverage. Typically, they also provide a higher percentage of replacement income and greater portability.
Two broad definitions of disability:
Under “own-occupation” coverage, benefits are paid if the individual is unable to perform the duties of his/her prior occupation. This is the most protective coverage available, and thus the most expensive. “Any-occupation” coverage, on the other hand, pays benefits only if you can’t work in an occupation that is consistent with your education, training, or experience.
For example, suppose a disabled person’s normal job involves lifting heavy boxes and getting paid $4,000/month. If the insured person is still capable of doing light assembly work at a workbench for $2,000/month, then he is eligible to receive 50% of his total disability benefit.
Group coverage generally replaces 40 to 60 percent of the insured person’s income, usually up to about $5,000 a month. This compensation is fully taxable if the premium is paid by the employer, but the company is permitted to deduct the premium as a business expense.
For example, if you worked in a warehouse and earned $40,000 annually, but then hurt your back and had to take a part-time desk job that paid less than $8,000 a year, your long-term disability policy likely would pay you full benefits based on your pre-disability wages of $40,000. If the full benefit per your policy was 60 percent, you would get 60 percent of $40,000, or $24,000.
Improving employee benefits
Along with risk diversification, individual disability coverage also improves employee benefits. Group LTD plans offer reliable income replacement for the vast majority of employees, although high earners may not have the same coverage with just group LTD insurance for three reasons:
• Protecting salary only: Most group LTD plans protect up to 60% of an employee’s salary without any protection for other compensation, such as bonus and incentive compensation.
• Caps on benefits: Group LTD plans usually have benefit caps based on moderate income levels, which could limit the amount of income replacement that highly compensated employees can receive.
• Taxable benefits: Employer-paid benefits, like the usual group LTD plan design, are taxable, so the actual income replacement may be substantially less than expected.
Highly paid employees get an additional layer of coverage by supplementing the group plan with individual disability insurance, which offers greater income replacement. This type of integrated coverage provides a group LTD plan for all employees at an affordable price. What’s more, the supplemental individual disability plan provides eligible employees with permanent individual coverage some benefits not normally found in LTD plans, such as level premiums and guaranteed standard issue.
Enriched benefits of individual disability insurance
Individual disability insurance reduces risk while improving benefits, helping companies to attract and retain employees. Multiple funding options are also possible. Best of all, it protects your employees’ total compensation.
Additional benefits of individual disability plans:
• Up to 100% income replacement coverage for catastrophic disabilities.
• Option to exchange individual disability for a Long Term Care policy after age 60.
• Custom designs that complement most group LTD plans.
• Fixed premium and non-cancellable coverage to age 65.
• Individually owned permanent disability coverage.
The benefits of transferring risk from group LTD to individual disability insurance are clear. This long-term benefit solution stabilizes group LTD plans, limits risk and volatility, and provides top earners with the protection they need.
We invite your questions and comments about group or individual disability insurance. Please leave a comment below, email, or call Archer Weiss at (800) 831-2901 to discuss your situation and get a quote.