Disability Insurance for High-Income Earners

May 19, 2021

Disability Insurance for High-Income Earners

Earning an income allows people to pay for not only necessary everyday expenses, but also the fun things in life. Income also funds retirement goals. Losing the ability to earn an income due to sickness or injury before reaching retirement or financial independence could devastate a person's financial plan.

Most individuals recognize their income is one of their most important assets, yet they underestimate their risk for disability. The likelihood of experiencing a disability during a working career for 90 days or longer is 1 in 4, according to the Social Security Administration. 

Group long-term disability (LTD) insurance offers an excellent foundation for employees but is often insufficient to meet the needs of high earners. This is typically the result of limitations in the plan, including but not limited to the taxability of benefits at claim time, incentive compensation not being insured, and plans capping the monthly benefit available. Let’s explore the challenges caused by low maximum monthly benefits in group LTD plans. 

Individual Level Risk – Future Income Potential

Most employees realize their prime income-generating years by their early 50s. However, even at age 55, there is still significant earnings potential over the remainder of a career. Chart A highlights how much income could be at risk as the result of coverage being limited due to the group LTD plan’s maximum monthly benefit.

CHART A: COMPOUNDED EARNINGS LOSS DURING A LONG-TERM DISABILITY

Higher Incomes = Larger Income Protection Shortfall

Group LTD benefits often target 60% income replacement, but when a maximum monthly benefit is applied, high-income earners will experience a substantially reduced benefit percentage as income grows. Chart B illustrates how earnings above $300,000 are impacted by a plan insuring 60% of earnings to a $15,000 per month maximum benefit.

CHART B: AS COMPENSATION GOES UP, PERCENTAGE OF INCOME REPLACED GOES DOWN

Key Employees Experience the Same Issue

For many employer groups, there are individual employees who may face an income protection shortfall due to their high income. This may include physicians, lawyers, C-suite officers, vice presidents, managers, and other professionals. 

Chart C provides a look at all employees eligible under an employer group LTD plan.

CHART C: EMPLOYEES BASED ON AGE AND INCOME

• Employer-paid group LTD  

• 60% of base salary to a maximum monthly benefit of $15,000

• Insures annual base salary up to $300,000

• Employees in orange have a benefit gap

• Benefit is taxable as income when received

The three visuals in this article use a group LTD benefit of 60% to $15,000. However, the maximum monthly benefit is commonly $10,000 or less, which would increase the income protection gaps for high earners. 

How Employers Can Close This Gap

Employer-sponsored individual disability insurance (IDI) can help close the income protection gap by offering access to additional monthly benefits that would increase total disability coverage (higher maximum benefit) and achieve a higher target income replacement level.

Employer-sponsored IDI provides key advantages to high-income earners and key employees that would not be available if they were purchasing the coverage on their own, while still allowing ownership and portability of the policy:

• Guarantee issue policies (medical exams and financial underwriting are not required)

• Policies with gender-neutral rates and deep premium discounts not otherwise available to individuals 

Employer-sponsored IDI can increase coverage to an optimal benefit level, enhancing financial security. M Financial Group has been a national leader in designing and providing executive income protection plans for businesses for over 30 years. Please contact a Member Firm to learn more.

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