Employer disability plans may protect a fraction of base salary, but they are often taxed and exclude other forms of income such as variable incentive compensation or performance bonuses.
Total Compensation and the Group Long Term Disability “Illusion”
Group LTD is among the most important benefits that employers often provide to employees, however it is only designed to replace a fraction of total compensation. These plans typically replace 60% of base salary, but here’s where it gets more interesting…
- Bonus, commissions and other variable compensation is generally not covered.
- Today, variable compensation is a regular portion of income for many employees, but those who have variable pay will have a much lower LTD income replacement than those on straight salary.
- Any benefit payments would be fully taxable when received.
- Plan maximums may cap the benefit well below the target for higher earners. Both total pay and structure vary by occupation, therefore actual income replacement for employees under LTD is all over the map. The common theme is that all employees would experience a substantial pay reduction if disabled.
Both total pay and structure vary by occupation, therefore actual income replacement for employees under LTD is all over the map. The common theme is that all employees would experience a substantial pay reduction if disabled.
A personal income protection plan can allow individuals to choose the right level of coverage for their needs, on a discounted policy that they own, and at no cost to their company or association.
Base and Optional Life Insurance – Why Not Base and Optional Disability Plans?
Employers often have a base and optional life insurance plan design to give employees more choice in protection levels, to cover all family expenses that his/her income is responsible for maintaining. A disability resulting in loss of earned income involves the same financial exposure to a family as life insurance, and is significantly more likely to occur than death during working years*.
Is there any good reason NOT to offer employees a choice to upgrade disability income protection levels in the same manner as optional life insurance plans?
*Source: Commissioner’s Individual Disability Table A
Risks of Self-Insurance – Retirement and Savings
Retirement funds are typically where the majority of liquid assets are held. Knowingly or not, many people are “self-insuring” the potential earnings shortfall resulting from a disability with these valuable savings. IRS regulations do allow for early withdrawal in the event of financial hardship, however, these funds can be depleted in a very short time when used to help offset the financial impact of a disability. In that event, the individual now has to deal with the ongoing disability and expenses, maintaining family lifestyle and needs, and the prospect of no retirement funds remaining for the golden years.
Individual income protection can not only protect the retirement nest egg, but give individuals the flexibility to use additional tax-free dollars as needed for current lifestyle and/or to continue funding retirement assets.