Have you ever used the Internet to search for a vacation rental, resort or hotel room? The pictures are spectacular with views and descriptions that lead you to believe you’re headed to paradise; at last you can vacation like the beautiful people. Sadly, upon arrival, it’s obvious that either they photographed the wrong place, only one room is as shown or the pictures were taken 15 years ago. Talk about disappointment!
In much the same way, Group Long-term Disability plans, called Group LTD, often fail to meet expectations. That isn’t because some unscrupulous salesperson or carrier misled the client. Rather, the employer or their employees simply haven’t examined the details thoroughly enough to fully grasp the shortfalls. That phrase “you don’t know what you don’t know” seems to apply. Let’s look at the realities of Group LTD:
Benefits are typically taxable so 60% does not equal 60%.
When Group LTD premiums are fully employer paid (50% of all plans), the benefits are taxable. For most claimants (40 states assess income tax) LTD benefits are subject to state and federal taxes. Taxable benefits are further reduced by FICA tax during the first complete six months of claim. Disability benefits from employer paid plans are easily taxed by as much as 30% initially, given state, federal and FICA tax. The result: a 60% benefit may actually replace only 42% of income.
Benefits are typically calculated using only base compensation.
Most Group LTD plans cover base pay, period. If clients receive incentive pay or bonus income their LTD plan likely excludes that income. For many, this causes a significant reduction in their expected benefit. If total income includes 33% incentive pay as illustrated, LTD benefits could be $5000 less than expected. Can a client provide for their family during a disability with a $5000 cut in pay? Notice the significant improvement when LTD is supplemented.
Benefits are subject to Group LTD maximum benefit caps.
More than 40% of in-force LTD cases have a benefit cap of less than $6,000 per month. This limits LTD benefits for any client earning more than $120,000! For those with substantial earnings, only 20% of in-force LTD plans use a benefit cap exceeding $10,000 per month. Imagine what your clients’ cut in pay might be if impacted by taxable benefits, uncovered incentive pay and the LTD benefit cap!
The comments above should not discourage participation in employer provided Group LTD plans. LTD often provides excellent protection for employees at minimal or no direct cost. However, strongly consider supplementing Group LTD with Individual DI when you encounter clients impacted by tax, caps and incentive compensation. Please contact me at firstname.lastname@example.org for additional information.
And for more information about selling disability insurance to groups, download our free report, “DI at Work: Three Great Options.”