Income protection is an important component to a financial plan, but gaps or limitations may cause surprise when needed if the current plan is not reviewed and understood by the client. Employers are a common provider of the most common form of disability coverage - group long-term disability (LTD) - but successful professionals may not be sufficiently covered.
Here are five items to consider when reviewing a group LTD plan:
1. What is the monthly maximum benefit?
Busy professionals may incorrectly assume they have a certain percentage of their income replaced should they become disabled, commonly 60% which is heard during the company’s annual benefit enrollment meetings. Looking closer, the group LTD plan will also have a monthly maximum benefit, such as $10,000 per month. Using the example of a plan insuring 60% of earnings to a $10,000 per month benefit, only $200,000 of annual income is actually being insured. If a professional is earning $300,000, only 40% of their income is protected.
2. What income does the policy insure?
It is very common to cover base salary only. What about commissions, bonuses, or other incentive compensation? Work earnings other than salary may be a significant percentage of a professional’s income.
3. Will the disability benefit be taxable at the time of claim?
If the group LTD plan premiums are paid by the employer, the benefits received from the plan will likely be taxable. If the professional pays for the premium as an after-tax deduction, the benefits will likely be tax-free. The impact to the benefit in the taxable scenario will be dependent upon the professional’s tax bracket.
4. Are there restrictions on common disability claims?
Group LTD policies may restrict the duration benefits are available to 24 months for special conditions, including any musculoskeletal/connective tissue disabilities - the number one cause of new disability claims (i.e. neck/back pain, arthritis, etc.). Other specific special conditions may also be limited. A standard limitation will be listed for conditions related to drug and alcohol abuse, anxiety, and depression claims, typically described as a mental/nervous limitation.
Note: Average claims are greater than 24 months for the two limitations described above.
5. Is coverage portable?
Professionals with developed skills are mobile and likely to work at several employers during their income-generating years. Group LTD plans typically have limits on the type of coverage that can be ported should they leave an employer, if they contain the option to maintain the coverage at all.
Many of these shortfalls can be addressed in some capacity using individual disability insurance (IDI) policies. An employer may even sponsor a plan to provide individual disability policies with discounted pricing and little-to-no underwriting. This is a great benefit to key professionals at any organization.