Who Needs Supplemental Disability Insurance
Group Long Term Disability insurance benefits are limited by an absolute cap, such as $10,000 per month. Even with a higher cap, LTD does not typically cover bonus, commission, equity-based pay, retirement contributions, or other variable compensation.
As a result, the actual benefits paid to some employees pencil out to less than the benchmark level of 60%.
To restore parity of income replacement ratios, individual disability insurance policies are issued as a supplement on the affected employees. These workers generally earn more than $100,000 ($200,000 if the LTD cap is $10,000) or receive incentive compensation.
There is no need to cover everyone.
Why People Need More than 60%
Independent of lifestyle questions, it's harder to live on 60% than it first appears due to the loss of employee benefits.
The shift in responsibility for medical insurance premiums cause personal overhead to increase upon disability. When an employee is no longer active, COBRA premiums are assumed by the individual, which may be $2,000 - $3,000 per month, after including out-of-pocket costs (more for families). This expense increases even more after the transition to retail individual coverage is complete.
Could you afford the additional expense of COBRA premiums?
Having to absorb COBRA premiums in additional to a 40% pay cut can turn hardship into a tailspin, especially with a family to support.
Additionally, forced early retirement carries real financial consequences. If 401(k) contributions are suspended during a period of disability (and by law, they are), what is a person to live on when disability benefits end?
Until a person can afford to retire, all earnings are essential.
What Replaces Retirement Contributions?
Forced early retirement is serious. To stay on track, supplemental disability insurance can be designed to get person to 100% income replacement. Learn more...
Supplemental Disability Income insurance mitigates these problems by getting employees closer to replacing 100% of earnings.
Guarantees and Features
Individual ownership
With Supplemental Disability Income insurance, each employee is issued their own individual policy. Unlike group LTD, there is no master policy.
Upon severance, the policy follows the individual because it is owned by the individual. The insurance company then redirects the bill to the individual for the same premium, but the individual can always choose to let the policy lapse. Going forward, the policy does not depend on the sponsoring employer in any way. Yet, the group discount is retained indefinitely.
Each policy is individually curated by the insurer based on a snapshot of earnings which must be broken down by type so that the insurer can determine what the underlying group LTD policy leaves exposed.
Individual policy benefits are not based on a percentage of earnings. Rather, they pay a specified fixed-dollar monthly indemnity benefit (e.g., $10,000 per month) with no need for a calculation at the time of claim, and no reductions for other benefit sources.
Since the gap will vary from one employee to the next, each employee may have a different fixed dollar benefit.
What happens as earnings change?
To keep pace with rising earnings, the issue amounts of each policy are ratcheted up at intervals determined by the employer, who supplies the insurer with updated earnings.
If earnings decline, supplemental DI policies hold steady. In accordance with the non-cancellable guarantee, discussed next, coverage does not go down. Just like a ratchet, coverage over time only goes in one direction...up.
Why the Non-Cancellable guarantee is important leading up to claim
The nature of disability is fraught with uncertainty and instability. Instability can set in well before a claim gets started - either because the situation is not quite bad enough to go on claim or the individual doesn't acknowledge their own reduced performance - leading to reduced hours, reduced compensation, and perhaps dismissal.
Flexibility and security are paramount. However, flexibility should not be allowed to compromise potential future benefits or eligibility, should it later become necessary to file a claim.
If the health situation does deteriorate to the point where a claim becomes justified, it would be important that the minimum hours for eligibility not be a problem; and for the benefit to be in line with normal (higher) compensation rather than recently reduced compensation.
To meet the calling for choice and security, supplemental DI policies are generally issued on a non-cancellable policy chassis, which guarantees that no portion of coverage will be cancelled - nor will the premium increase - prior to some age like 65, provided the premium is paid on time. This insulates the individual against a decline in earnings, hours, or separation of employment.
The non-cancellable guarantee is unique to individual disability insurance, and is the key to personal choice and flexibility without compromising financial security.
Superior definition of disabled
Supplemental DI is generally issued with a definition of disability that allows a person to qualify as disabled even if it is possible to do something else. Compared to group LTD, the definition of disability with supplemental DI can be characterized as more favorable in how it defers to the individual on return to work matters and tolerates moonlighting while on claim.
No offsets
Supplemental DI benefits are generally paid as-is, independent of other benefit sources. Unlike group LTD, supplemental DI benefits don't require a calculation, even if the resulting earnings replacement exceeds 100%.