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Putting Risk in Its Place with Long-Term Disability Coverage

July 2, 2019

What if you woke up one day and through no fault of your own – your salary was reduced by 40 percent. You weren’t demoted, fired or boldly in the throes of a disruptive career change. It’s a safe assumption the impact would be significant.

You and your family’s world would be turned upside down financially and emotionally. Could you cover your mortgage or fund your retirement? What if, at the same time, you experienced a significant increase in medical expenses – or perhaps even had to pay your own premium?

After sorting through the shock, would you feel comfort in the fact that you have your company’s long- term disability (LTD) coverage to kick in and save the day?

Just over half of all employers provide their workforce with a group long term disability benefit. Yet even in organizations where coverage is available – it is often insufficient to protect most employees.

The realities of LTD benefits can come as a surprise. Most company paid LTD policies only cover 60 percent of an employee’s pre-disability earnings. Disability income from employer paid disability insurance policies is typically taxable, further diminishing the disabled employee’s take home earnings. Between both realities – the average claimant takes home less than 50 percent of their pre-disability income.

Beyond these far reaching limitations, most policies also protect “base” earnings – leaving employees prone to high overtime payments or variable/incentive compensation unprotected.

Perhaps of greatest concern is the traditional limit on monthly benefits. Over the last 10 years, the median monthly benefit limit for disability policies has decreased while earnings have increased nearly 27 percent.

This scenario doesn’t paint a pretty picture for the disabled employee, their family and – when all is said and done – a company that is trying to protect its key talent.

For a variety of reasons, companies have employed a “it’s not broke, so why fix it?” mentality on managing their disability policies and coverage. Unfortunately doing so is leaving most employees at risk.

One factor contributing to the “status quo” mentality is cost. Due to increasing frequency of claims, LTD premiums are on the rise. As employers work to manage and even reduce today’s total reward budget, enhancing coverage levels is increasingly difficult when facing a premium increase.

How do companies overcome this challenge? By looking at their LTD coverages more proactively and creatively.

Kyle Anthony, Director, Human Capital Practice for Oswald, says companies need to look at their LTD coverages differently, shed old provisions and carve out coverage to protect their key employees as well as the business.

“We’ve been working with a lot of new clients over the last few years, and we are constantly amazed at the number of them who maintain policies with outdated provisions or plan parameters that result in higher premiums or inadequate coverage, “says Anthony.

Specifically, Anthony points to the potential concerns around a company’s key executives.

“When key executives are covered under the company’s general disability program, it can leave the company with a significant cost load while also underserving the executive’s specific needs,” says Anthony.“ Carriers normally apply a premium to ensure high earners and the typical policy fails to insure even 30 percent of a typical executive’s compensation.”

One solution is the use of Individual Disability Income (IDI) coverage for top executives as a separate a supplemental strategy from the standard company plan. IDI plans are underwritten like group policies, while providing higher limits and more customization of benefit provisions based on the individual’s goals.

Oswald has consistently seen opportunities to reduce a company’s cost to provide LTD by 15 to 25 percent and reallocate that investment toward funding the more effective and comprehensive IDI product.

“Amazingly, moving key employees into IDI plans also limits the potential risk on the larger group LTD contract, so this is a strategy that has both short- and long-term gains,” adds Anthony.

Companies offering IDI plans to top earners are creating an effective risk management tool as well as an attractive recruiting or retention incentive.

What IDI Plans Offer

  • They can raise the amount of coverage from 60 percent of pre-disability earnings to 70 percent.
  • Some policies offer coverages that pay out benefits tax-free.
  • Offer a more generous definition of disability. For example, most LTD coverages only cover two years for mental breakdowns, but certain IDIs remain in place for as long as the employee can’t work (see sidebar story).
  • Select IDI policies have riders that continue to make contributions to the employee’s retirement plans.

Expanding the Definition of Disability

According to a white paper issued by the Tufts Medical Center, mental disorders are the single most expensive category of health costs for many employers, across all industries and sizes. This should not come as a surprise as performance-related stress among c-suite occupants and top rainmakers continues to ratchet up.

What is the impact on American businesses and its employees? A Gallup Poll estimates that workers diagnosed with depression miss 68 million additional days of work each year than their counterparts who have not suffered depression. The absences result in an estimated cost of more than $23 billion in lost productivity annually to U.S. employers.

“A shortcoming in many company wide long-term disability policies is the amount of coverage time for mental breakdowns,” says Monica Trusley, Oswald’s Vice President of Sales, Strategic Accounts Group.“ And most employees and their employees don’t know they aren’t fully covered until they go on disability.”

The following case study illustrates the point:

An investment banker became disabled with clinical depression and attention deficit disorder. He continued working for over a year, but his condition deteriorated, and he began experiencing anxiety, exhaustion, dysphasia and impaired concentration. His doctor recommended in-patient treatment and prescribed a host of medications.

He was fired for non-performance, sued his employer for wrongful termination and filed a disability claim with his long-term disability carrier.

His policy defined Totally Disabled for the first two years on his claim as the inability to perform the duties of his own occupation. After two years the definition changed to the inability to perform the duties of ANY occupation for which he was qualified by reason of the insured’s education, training or experience.

The insurer initially denied his claim saying that there was insufficient evidence of clinical depression, and that there was no proof that the claimant could no longer perform his job duties.

Trusley says the takeaway is for companies to be forward-thinking when designing long-term disability programs for key employees or run the risk of leaving them unprotected.

She encourages companies to engage Oswald to help identify cost savings – is there a waiver of premium benefit that no one uses or extending out the natural retirement age beyond 65 – and put in place long-term disability coverages that are tailored to the needs of their key personnel.

For more information, contact:
Kyle Anthony
Director, Human Capital Practice

Note: This communication is for informational purposes only. Although every reasonable effort is made to present current and accurate information, Oswald makes no guarantees of any kind and cannot be held liable for any outdated or incorrect information. View our communications policy.