May 14th, 2018
Many businesses provide disability insurance for their workforce, but often, it can be cost prohibitive to offer higher maximum benefits for all employees. This can lead to underinsured high-earners, such as Executives and Key Employees, who do not have additional Executive and Key Person Disability coverage.
Should these high earners take disability leave, many may find their benefits capping as low as 60%, 50% or even 40% of their total income. This is often too low to sustain their current lifestyle in the event of a long-term disability.
According to recent studies, 69% of Americans have less than $1,000 in savings and 55% claim they break even or spend more than they make every month.1 Of those earning more than $100,000/year, 40% say they live paycheck to paycheck.2
The Social Security Administration predicts that 25% of US workers ages 20-50 will become disabled before age 67,3 which highlights the importance of providing financial protection for key employees in the event of a disability. Without additional financial security, high earners may struggle to pay mortgages, healthcare bills, and other monthly expenses.
Unfortunately, many owners, executives, and other key employees do not realize they are underinsured.
If a key person making $200,000 annually receives disability income from a typical 60% Long Term Disability (LTD) policy with a $7,500 maximum benefit, that key person would only receive $90,000 annually from claim payments, a 55% reduction to their compensation.
In addition, many LTD plans do not include coverage for income sources such as bonuses, commissions, or business owner income draws. This can result in a staggering number of individuals who are underinsured, as illustrated in the graph below.
With Executive Disability policies, high-earners have access to greater maximum benefits and alternative compensation coverage (bonuses, owner draws, etc.) which may not be available on a group plan. These policies are individually owned, making coverage fully portable so employees may keep their plan should they leave the company or retire.
Most coverage amounts are guaranteed issue, meaning a member may not need to go through medical underwriting to have a policy issued. This is one of the big deterrents for individually written policies and in most cases, Executive policy rates are more affordable than individual policies. Contracts are also non-cancellable and premiums for most plans will not increase. Additionally, plans are typically written with no policy offsets, so claim payments are not reduced due to state disability, workers compensation, or social security.
Our Brown & Brown Employee Benefit Consultants can assist in guiding your company toward policies that protect your Executives and Key Employees. Contact us for a complimentary assessment of your current coverage and for more information on available policies.
Brown & Brown is the 6th largest insurance intermediary in the country. More than 75 years of success has enabled us to identify new opportunities, adapt our solutions and services to meet changing market demands, and satisfy the various needs of our customers. Backed by national strength and local presence, with over 300 locations and 8,500 teammates strong, we have solutions to fit all your insurance needs.
This is Part 2 of our “Key Employee” series. Click to read Part 1 – Key Man Insurance: Extra Protection for your Business
1 Pew, “Americans’ Financial Security” (2015)
2 Lending Tree, “Survey: 44% of $100-149K Earners Live Paycheck to Paycheck” (Aug. 4, 2015)
3 Social Security Administration, “Disability and Death Probability Tables for Insured Workers Born in 1994” (Dec. 2015)