In my last blog, I talked about the four stances employers tend to take regarding income protection programs for their executives. Let’s dive into these attitudes to see where opportunities lie.
1. Self-funding benefits. Employer’s think the risk of disability is low, so they plan to self-fund the benefits.
Downside: When a claim does occur, it can be a major financial event. The cost of just one $10,000/month claim paid for 20 years can exceed $1M (on a present value basis). Also that cost needs to be reflected in GAAP accounting documents.
Solution: Rather than taking on the entire risk on their own, employers can use insurance to mirror reinsurance agreements. They can define their liability and benefit caps in writing to reduce their exposure. For instance, an employer may limit the monthly benefit amount to $15,000. The employer could self fund the risk for one year, handle risks above a set limit, say $7,500, and let an insurance carrier handle benefits of $7,500 and lower.
2. Group long-term disability (LTD) benefits only. Employers opt for group insurance to cover employees. Group LTD provides a strong base for income protection. Designs often cover 60% of an executive’s income (up to a maximum monthly amount).
Downsides: Executive incentive compensation may not be covered or there is a cap on coverage. This may result in discrimination against a highly compensated class.
Solution: A supplemental individual Disability Income (DI) policy can help cover gaps.
3. Combination programs. Employers take a hybrid approach by blending multiple programs.
Downside: Merging individual and group insurance with self-funding into a single solution can be complex, requiring a thorough understanding of potential complications.
Solution: I’ve found that coordinating policy features and elimination periods is key for a successful implementation. Also when employers combine all three, they can customize programs to their own compensation formulas. It also offers great potential for giving employers and executives the best of all three structures.
4. It’s not our responsibility (no program).These employers feel disability insurance planning is the executive’s responsibility.
Downside: Lacking a company-sponsored disability insurance program may restrict an employer’s ability to attract top talent. And, when a disability does strike, is the employer really ready to step out of the situation?
Solution: One way to ease employers into providing coverage is with a voluntary (employee-paid) program for group LTD or individual DI. It costs employers nothing, yet protects executives’ incomes – often at a discount.
All four options offer workable solutions for employers to offer executives this key benefit. I’m interested to hear how you’ve approached employers in these types of situations. What’s worked? What hasn’t?