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May 18, 2021

Do Your Executives Have LTD Coverage Gaps?

Most people don’t spend a lot of time thinking about disability insurance – until they need it. May is Disability Insurance Awareness Month, so this is a good time to think about the insurance before there’s a need. One of the things to consider is whether your highly paid executives have sufficient coverage – because there’s a good chance they don’t.

Some Coverage Is Better Than None – But Not Always Enough

The U.S. Bureau of Labor Statistics says that 34% of private industry workers have access to long-term disability insurance plans. This means that about one in three workers has coverage, while the other two are left without protection.

Obviously, the workers with no coverage are exposed to the financial risks that a disability can cause – but what about the workers with coverage? These workers might assume that they’re all set. Some of them might be very wrong.

Employer-based long-term disability programs typically provide benefits to replace about 60% of the employee’s regular salary. That’s a steep pay cut that will take most people a major adjustment, and the employee still has to pay tax on it.

It gets worse for highly compensated employees. Long-term disability insurance policies typically have a monthly benefit cap, such as $5,000. This means that anyone earning more than $100,000 a year will receive LESS than 60% of their regular salary – and they’ll still need to pay taxes on their benefits.

Put Yourself in Your Employee’s Shoes

Imagine you have an employee who earns $160,000 a year. She’s a high-level executive and very valuable to your company, so she deserves every penny of her salary. Then she’s diagnosed with cancer, and she has to stop working while she undergoes treatment. You support her, and you’re relieved she has long-term disability insurance coverage through the company to help her out financially during this difficult time.

What you don’t realize is that her family is still struggling financially. She used to earn more than $13,000 each month. Now she’s only getting $5,000 before taxes. Her family quickly runs through their savings as the medical bills pile up. Then they have to figure out how to start cutting back on costs.

Some insurance coverage is better than none, but your employee wishes she’d known how much the LTD benefit cap would impact her family.

There Is a Solution

Long-term disability insurance is a great benefit. For some employees, it may be adequate on its own. Other employees will need to supplement it with additional coverage. This is especially true for any employee earning more than $100,000 a year, as these employees will be impacted by the typical $5,000 monthly benefit cap.

Employees who need additional coverage can purchase individual long-term disability insurance on their own. You can also offer these employees a guaranteed standard issue disability insurance policy as part of an executive compensation package to supplement the underlying LTD policy. This is a good way of ensuring that they obtain the coverage they need, while also positioning yourself as an employer that values and takes care of its team.

If you’d like to learn more, please reach out to the Heffernan Insurance Brokers’ Financial Services team.

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