Executives generally are not aware that they have shortfalls and gaps in their broad based group long term disability coverage. This applies to both the size of the monthly benefit and the language in the contract that the insurer uses to accept or deny claims.
The most common Group LTD benefit is 60% of compensation. Most C-Suite folks stop right there and assume they are well protected. Unfortunately, the fine print that follows creates the following road blocks, which disproportionately impact the highly compensated members of the group:
- Maximum monthly benefit - If the benefit cap is $10,000 per month, it only covers an annual salary of $200,000. If it is a $15,000 cap, $300,000 of annual salary is covered. Note the word “salary” as opposed to total cash compensation.
- Definition of monthly earnings – The group contract will define covered compensation and with very few exceptions, bonuses are specifically excluded. For example, if your CEO has a $200,000 salary and a $100,000 bonus for a total of $300,000, even with a $15,000 maximum benefit, the insurer will only pay $10,000.
- Social security offset – Most LTD plans reduce the benefit computed under the contract by the amount of Social Security disability benefits paid. For lower paid employees, the net result is 60% from both sources, which is the intent of the plan. For those exceeding the benefit cap however, it is simply deducted from the max benefit. This can leave senior executives with a significant shortfall from the 60% target.
- Definition of disability – For executives, “own occupation” language is important vs. “any occupation” clauses. The contract may call for a switch from the former to the latter after a specified period of disability, e.g. two years. This may allow the carrier to circle back and re-evaluate the claim.
- Portability - In most cases the benefits are not convertible to an individually owned, portable policy like group life insurance or COBRA health benefits. Having individual policies that can travel with the executive could be important if health has changed over time.
Example: A 50-year-old executive with a $300,000 salary and a $75,000 bonus was covered by a 60% policy with a cap of $10,000, a Social Security benefit of $2,900 per month and a coverage limitation to base compensation only. With a total of $375,000 of annual compensation or $31,250 spread monthly, he would receive only $7,100 a month from the insurance carrier if he became disabled, and because he was not being taxed on the monthly premium, the $7,100 was income taxable.
With individual executive disability planning, MKA can provide enough coverage to take the benefit, including the $10,000 from group coverage and Social Security, to $18,750 per month, and with proper tax planning, the amount would be income tax free.
For further information, contact:
Dennis Sexton dsexton@mkaplanners.com 781-939-6060 (o) 978-395-6741 (m)
Barry Koslow bkoslow@mkaplanners.com 781-939-9050 (o) 781-724-6695 (m)
Ed Perry eperry@mkaplanners.com 781-939-6086
To ensure compliance with requirements imposed by the IRS, we inform you that any federal tax advice contained in this communication, including any attachments, was not intended or written to be used, and cannot be used, for the purpose of avoiding federal tax related interest or penalties. Securities offered through Advisory Group Equity Services, Ltd., member FINRA/SIPC. Advisory services offered by Trust Advisory Group, Ltd., a registered investment advisor. 444 Washington Street, Suite 407, Woburn, MA 01801. 781-933-6100.
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