The Overlooked Retirement Risk — Executives’ Second Disability Need

For employers who’ve addressed income protection for their executives, Bravo! You’ve taken care of an often-overlooked executive benefit issue. Now the question is, have you thought about what happens to those benefits in the executives’ retirement years?

Most disability income (DI) insurance policies offer benefits until retirement, commonly age 65 or 67, and then they stop. That means an individual on a disability claim would no longer receive monthly checks once reaching retirement age. This is what I call the “second disability need.”

While the executive may have retirement assets, it’s likely that not working due to an illness or injury has taken a financial toll. How does this happen? Qualified retirement plans only provide significant asset accumulation if three factors work together:

  1. The employer or employee funds the plan.
  2. Plan contributions are made over many years before retirement.
  3. Invested funds earn dividends and interest. This, combined with increasing plan assets, provides the total accumulation.

In most cases, when an individual faces a disability and can no longer work, contributions to qualified plans stop. With this crucial component of asset accumulation out of commission, there is now a serious gap in potential retirement savings.

A good solution is to offer DI coverage specifically designed to protect retirement savings. These policies provide monthly benefits, just like traditional individual DI insurance, but instead of paying benefits to the employee, benefits are paid (tax-free!) to a trust where they are invested for retirement. At retirement, as traditional DI benefits wind down, these benefits kick in. The executive can access the benefits as retirement income, helping supplement other assets.

I’ve seen a number of companies in a variety of industries help their executives take care of this critical second disability need by implementing this type of coverage. It’s a simple solution that can have big results on the quality of life in retirement.

DI8947  02/2014