Excess Disability Insurance Myths

MythOne of our regional representatives, on a recent call to an employee benefits firm, had the firm’s owner make a common comment which is more myth than reality. As they were discussing “group” (GSI) excess disability coverage, the producer said his firm does not write that type of business, nor do they have any clients that have that need. He remarked “we only do benefits”! Our rep was puzzled and asked them “don’t benefits include group disability insurance?” “Well yes” was the response. “But we would not write executive-type coverage, we leave that for the financial planners.”

Herein lays the foundation of the myth – someone else will handle that!

Benefit folks seem to think that once they place the medical insurance and a layer of group LTD, all is good. The truth cannot be further from this perception.

Group LTD was designed to cover everyone equally, no favoritism. What group LTD sounds like it does is put on par the same benefits for the rank and file as for the top executives. Benefits specialists recite that the group LTD covers 2/3 of income. Therefore, they believe, their job is done. However, what they miss is the “LTD benefit cap” and the limitations on how “income” is based.

There is no doubt that group LTD does a marvelous job for what it was intended, covering rank and file employees. Group LTD also has a benefit cap which is often between $5,000 and $10,000 per month. Protecting 2/3 of income “up to” the benefit cap of $10,000 works fine for most staff incomes, but what about the executives, managers and sales people?

$10,000 of monthly benefit is 2/3 protection for an annual salary of $185,000. That is a great income, but many times less than what top industry earners are making, thus as income surpasses $185,000, the 2/3 protection begins to noticeably decrease. Also, income, under Group LTD, is based upon pure W2 earnings. Contributions toward pensions and commission income are not taken into consideration, again the 2/3 percentage slides further down.

Excess disability insurance is designed to layer over existing coverage (group and/or other individual disability income plans) to bring financial protection levels up to 2/3 of annual earnings – REGARDLESS of income level, or if received through bonus or commissions. Additionally, income that is contributed toward pensions is also included!

Excess disability insurance can be purchased as an individual program or in a “group” format such as a GSI plan in which there are group underwriting concessions, but individual policies are issued. In the absence of excess disability insurance, a higher-compensated employee could lose thousands (or even tens of thousands) of dollars per month in the event of a disability.

Getting back to the “myth”, we find that often times benefits experts believe that those higher-income-earning executives have financial planners who “take care of all that.” Another myth.

Many financial planners ignore looking at the entire disability protection picture. They believe that if there is a basic plan in place, it should be sufficient, and in turn, focus on the need for life insurance and investment and savings programs. What they miss is that savings and investment vehicles are dependent upon cash flow. In the event of a disability, income stops fairly rapidly which in turn could impact the ability to save and investment.

So here we have benefits experts thinking that financial planners are taking care of the total disability protection picture and financial planners who think that employee benefits advisors have provided sufficient coverage for their clients. The good news is that there are solutions for both the employee benefits experts’ clients and for the financial planners’ clients. Group benefits folks have a perfect solution available, a GSI excess disability plan can be offered for those employees needing additional protection. The financial planner can offer excess disability to their client as an individual policy.

There are two common myths:

  1. My client has group and/or individual disability insurance, therefore he/she has enough coverage.
  2. We leave that for someone else to write.

Regardless of your expertise, you should never assume that someone else is taking care of your client. You have the tools, and perhaps the responsibility, to make sure your clients are fully insured for an unforeseen disablement.