Closing the Income Protection Gap for Your High-Income Employees

Insight By
Gene LoVasco

When Was the Last Time Your Disability Insurance Plan Was Evaluated?

Income protection is a critical benefit for all employees in the event of illness or injury. Many employers address this issue by offering Group Long Term Disability (LTD) as part of their benefit plan. Although this is a valuable benefit, over the last 10 to 15 years, incomes have risen and now many plans often do not provide enough coverage for higher income earners.

Why is There a Protection Gap for High-Income Employees?

While Group LTD may provide a foundation of coverage for all employees, it does not adequately protect the total earnings of a high-income executive. With the gap in replacement income, the ability to maintain their lifestyle and achieve their financial and retirement goals are put at risk.  

Some of the challenges of Group LTD plans include:

  • Limited monthly benefit maximums that often leave the higher earners underinsured
  • Often exclude incentive compensation such as bonus and commission when determining benefit amounts, which can be significant  
  • Often taxable when receiving benefits, further reducing after-tax income replacement  
  • Premiums fluctuate and are not guaranteed over time
  • Coverage is not portable

The Scatter Graph shown here is a helpful visual to understand the potential coverage gaps for an employee population. This is an example of a commonly provided Group LTD plan design with a benefit equal to 60% of income up to $10,000 per month. This benefit covers $200,000 of annual compensation, which creates a gap for those higher income employees in orange. The higher the income, the larger the gap. Furthermore, even for those employees in grey, there are the restrictions mentioned previously which could impact their lifestyle in the event of a disability.


How Can Employers Help Close This Gap?

By using an integrated solution, you can maintain core coverage for employees plus offer your executives an additional layer of protection. Many employers find that providing a Supplemental Disability Plan is an optimal solution to address this unintentional gap. An employer-sponsored plan provides key advantages to an employee versus the employee purchasing coverage on their own, including:

  • Guarantee issue underwriting—Medical exams and financial underwriting are not required.  Since only about half of individual disability insurance policies applied for are issued, this is a significant benefit.
  • Discounted pricing—Policies are offered with gender-neutral rates and deep discounts not otherwise available to individuals.
  • Contractual features—An employer can customize the Supplemental Disability Plan to include additional or stronger benefits that the underlying Group LTD plan may not, which may have a disproportionate negative impact on the high-income population.

An employer-sponsored Supplemental Disability Plan is a great solution to provide income protection coverage, as well as a powerful tool to help recruit, retain, and reward key employees.

Would you like to learn more? We can conduct an income protection plan review, including a Scatter Graph visual, to make sure your plan is up-to-date based and in line with benchmarking data. Contact a LoVasco team member today.

Insight By
Executive Benefits Consulting
Gene LoVasco
President
File Number

Not Applicable

Topic
Executive Benefits
Published on

October 15, 2020

updated on

October 15, 2020

Disclosure

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

Securities and Investment Advisory Services offered through M Holdings Securities, Inc., a registered Broker/Dealer and Investment Advisor, member FINRA/SIPC. LoVasco Consulting Group is independently owned and operated.

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