EXECUTIVE BENEFITS: INCOME PROTECTION AND BENEFIT CHOICE
As a benefits professional, you may be required to provide a group long-term disability (LTD) plan for your employees. Did you know that in addition to providing the ability to help employees protect their income while disabled, you are also providing a third-party adjudicator (the insurance carrier) in the event of a dispute regarding whether an employee can or should return to work? From an employer’s perspective, assisting a disabled employee when returning to work is much less expensive than hiring and training a new employee.
When making benefit choices, many employers choose to increase the maximum monthly benefit of the LTD contract. This is usually done when there are highly compensated employees whose benefit replacement percentage falls below the benefit replacement percentage that is offered in the plan for all other employees.
LTD plan = 60 percent of salary to a maximum monthly benefit of $10,000 per month.
- General employee making $75,000 annual salary would receive $3,750 per month or 60 percent.
- C-Level executive making $250,000 annual salary would receive $10,000 per month or 48 percent.
Benefit Choice #1 – Employer changes the LTD plan from a maximum monthly benefit of $10,000 per month to a maximum monthly benefit of $12,500 per month. Now, a C-Level executive has a 60 percent of salary replacement, which corresponds with the percentage received by other employees.
Problem: The rate ($ per hundred of monthly covered payroll) increases and the employer bears the cost for this change. Now the C-Level employees have a better plan, but there is no added benefit to the
employer. In fact, there is no difference in the level of service provided by the carrier for rehabilitation or return-to-work benefits.
Benefit Choice #2 – Employer keeps the LTD plan maximum at $10,000, but also offers a voluntary, supplemental individual disability plan to those executives who have a gap in their income protection.
See charts below.
Solution: By offering the supplemental plan, those executives who want to fill their gap can do this on a payroll deduction basis, usually with guarantee issue and permanent, portable discounts on their individual policies. Also, by keeping the LTD plan design, there is no rate increase to the employer.
This solution has been a win-win for many employers who are making the choice to integrate group and individual disability plans. Check with your Employee Benefits consultant to confirm that you are making the right choice when it comes to income protection for your employees.