When most of us sit down to list our financial planning priorities, retirement, college tuition and life insurance usually are at the top.
What most people overlook, however, is the very thing that makes all of this planning possible: their income. The cornerstone of any sound financial plan is protecting your income. Many employees never ask themselves: What if my ability to earn an income was compromised due to a disability? What happens to my financial plan then?
Compounding the problem, many companies' disability plans have gaping holes that result in a weakened financial condition for an employee who gets sick or hurt and cannot work. Two-thirds of American households are living paycheck-to-paycheck, and the average American family cannot make it more than four weeks without income, according an April 2006 report in Parade magazine - well before last year's economic collapse.
Given this stark reality, analyzing your company's group disability plan is an extremely important step toward giving your employees the opportunity to build a solid financial plan.
Three main questions
Three criteria in particular have a substantial impact on your employees' financial situation if they needed to use their disability benefits:
1. Is the benefit taxable?
2. What kind of earnings are covered in the underlying definition?
3. Are bonuses covered?
Answering these three questions is the first step in customizing your group long-term disability plan.
Most employees have not done the actual math to determine what their disability benefit would be and how that relates to their personal obligations. As the benefits professional, you must fully understand this gap to help employees assess their "exposure" and then decide what can be done about it. Many companies are starting to take this topic more seriously and looking to find ways to help educate their employee population on this exposure.
Supplemental programs
Once a company gets its underlying group disability plan in line with its compensation structure, it can turn to supplemental programs that can dramatically help an employee's situation. Adding such supplemental programs gives employees the ability to have a higher replacement ratio percentage of their total compensation, not just the standard 60% replacement ratio of salary, which is typical in the group disability arena. Many times, the supplemental disability program will allow a replacement ratio of 75% of someone's total compensation including bonus. If a program is well-designed and the employee population is well-educated, a program such as this can give an employee the ability to close the gap mentioned above.
Here's a quick example. Suppose you have an employee with an annual base salary of $60,000 and a bonus of $40,000. If your company provides an LTD plan that covers 60% of base salary to a maximum of $3,000 per month, this employee would receive $3,000 monthly.
With the bonus, this employee's actual monthly earnings are $8,333 ($100,000 divided by 12). Since this employee's bonus is not covered under the LTD plan, this employee's actual disability benefit is only 36% of total predisability income - not 60%. If the program was designed to allow a replacement ratio of 75% of this employee's total compensation, which is $100,000, this employee could purchase a supplemental policy in the amount of an additional $3,250 per month of benefit on top of their group benefit, which maxed out at $3,000 per month. ($100,000 x .75 = $75,000 / 12 = $6,250 - $3,000 [group coverage] = $3,250 of supplemental disability benefit.)
If this same employee had household expenses above $3,000 per month, he might be interested in purchasing some additional disability insurance to help offset the shortfall between his monthly obligations and his group disability benefit. Many times, a supplemental program can be beneficial just by virtue of offering some additional protection to offset the tax impact of the group LTD benefit alone. In the example above, if the $3,000/month is a taxable benefit, the employee would receive less than $3,000 based on his tax bracket.
Another area where exposure can be created by the group LTD plan's design is with the monthly maximum or cap. The maximum benefit can cause the income ratio to be an amount lower than 60%.
Here's another example of how the monthly maximum in a group plan could cause exposure for an employee. Your company might have an LTD plan designed to offer 60% of monthly base salary to a maximum of $3,000 per month. An employee earning a salary of $100,000 would receive the maximum benefit, which is $3,000 per month. The employee's monthly base salary is $8,333 ($100,000 divided by 12). Sixty percent of this would be $5,000 per month, but because the company's LTD plan has a monthly maximum of $3,000, the employee would receive an amount closer to one-third of his predisability income in reality.
Please note these supplemental programs can be offered on a voluntary or employer-paid basis. These supplemental programs can bring other advantages to employee populations, such as simplified underwriting and premium discounts that employees would find difficult to duplicate in the marketplace on their own.
Understanding how your group disability plan works for your employee population is crucial as it relates to your own ability to communicate the significance of this benefit for their own personal financial planning. Carefully consider customizing your group LTD plan with the elements described above and also consider whether a supplemental disability program would be a suitable enhancement. At the very least, educating your employee population about the financial impact of getting sick or hurt is extremely valuable.
Jim Mooradian is founder of Jim Mooradian and Associates, Inc., a Boston-based full-service insurance brokerage that specializes in supplemental insurance programs, including voluntary benefits and supplemental disability programs. Contact him at 617-423-0062 or via www.jmooradian.com.
