Disability Income

Financial Directions will work with you to design disability for your executives that provide the following benefits:

• Helps protect executive income and assets
• Helps stabilize or even reduces total disability premiums and liability risk
• Provides executives with portable, permanent policies
• Seeks to improve benefit features

About Disability Income

Although long-term disability benefits are usually provided through group policies, those plans include income maximums that cover the full salary of most employees - not top earners - so highly-paid executives often end up with a sizable amount of unprotected earnings. 

For executives, that translates to far less disability income coverage than they actually need, especially since the benefit percentage for most group plans is only 60 percent to 70 percent to begin with. Plus, group plans normally do not insure any variable compensation such as bonuses and other incentive pay that can easily account for more than 50 percent of an executive’s cash compensation. To make matters worse, the benefit itself is usually taxed, so disabled executives end up with only a fraction of total compensation as replacement income - when they need it most. 

Many times, organizations look for a solution at the source of the problem, the group plan maximum limit. On the surface, increasing that maximum appears to be a sound solution. But a higher group plan maximum means higher premium rates for all employees, across the board. And a higher maximum alone usually cannot make up for the entire income shortfall for executives.

Also, when a disability claim for a high earner hits, it can create enormous claim reserve liability up to ten times the annual premium. And that extra liability inevitably triggers a costly premium increase. So in the end, the organization pays more for high-maximum group plans, and accepts more risk, for what amounts to less than adequate coverage for executives.

In fact, a better alternative to increasing the group plan maximum may be to actually reduce it to a reasonable level, then bridge the income replacement gap for executives with individual disability policies. This strategy enables the organization to shift volatile high-earner claim risk to stable, fixed premium policies. And it provides executives with portable disability coverage that may:

• Protect income over the group plan limits
• Include bonuses and incentive pay
• Increase benefits to keep pace with inflation
• Eliminate Social Security disability payment offsets
• Provide extended mental and nervous benefits
• Pay benefits for the inability to perform one’s own (not just any) occupation

Disability Income Design

The foundation of every executive disability program is the basic group disability plan. So the basic plan needs to be evaluated first, because you cannot simply stack extra executive benefits on top of it without risking the integrity of the entire program. For example, basic group disability plans are often designed with extra-high maximums to accommodate a few top earners. However, that approach can jeopardize a plan’s long-term financial success, because just one high claim often leads to a big rate increase – that applies to all participants. 

Basic group plans, though, can be redesigned to make the best use of premium dollars and to stabilize long-term plan costs. Financial Directions has the experience to help you design the disability plan that will help you achieve your company’s needs.

We design solid plans that serve as a platform for individual disability policies, typically with no medical underwriting. These individual policies can also include extra benefit features that the basic disability plan does not offer; for example, extended mental and nervous coverage and disability benefits for an executive’s inability to perform his or her own (not just any) occupation. Plus, individual plans may have guaranteed* benefits and premiums and can be designed to capture total compensation including:

• Bonuses
• Stock Options
• 401(k) contributions (employee and employer)
• SERP contributions
• Non-qualified deferred compensation contributions

Obviously, individual policies that cover all types of compensation may provide better executive disability protection. And they may also protect the company, since the risk of high-dollar claims (and the rate increases they generate) is transferred from the group plan to a permanent, fixed-rate policy.

However, individual disability plans can only replace income; they cannot protect executive assets from the high costs of disability such as in-home or facility-based nursing care. For many people, paying those bills may mean liquidating assets that were earmarked for other important purposes like retirement, for one. But long-term care policies can help protect those assets with permanent, portable, and inexpensive coverage. 

In fact, a well-designed executive disability benefit program can be an attractive recruitment and retention tool. And it can also generate immediate savings, because a fine-tuned program is a cost-efficient one. 

That means the company may actually pay less – for substantially better benefits. 

Disability Income Administration 

• Review plan design
• Manage enrollment process
• Manage annual and ongoing tasks

*Guarantees are backed by the claims-paying ability of the issuing insurance company.