Disability Insurance for High Earners
Your paycheck protection needs to fit your paycheck. High-income earners have bigger paychecks, so they have bigger paycheck needs. A group disability insurance policy probably won’t provide enough disability insurance for high earners, but it’s possible to secure suitable coverage by layering.
When you secure a home loan, you expect to be able to keep up with the payments. However, these expectations are probably based on the assumption that you’ll keeping earning a paycheck – what happens if a disability prevents you from working?
According to Debt.org, medical emergencies and illness resulting in medical debt are a key reason for foreclosure. Job loss or a reduction in income are other major reasons. When an unexpected disability occurs, many people experience both medical debt and job loss. This can be an untenable situation – if you don’t have the right insurance, you may lose your home.
Group Disability Insurance Can Leave High Earners Exposed
Let’s say there’s a man named Peter. He’s an accountant, and he earns $90,000 a year, or $7,500 a month. Not bad. His family depends on his paycheck, so he’s happy he has group disability insurance through his job. If he can’t work due to an illness or injury, his policy will pay 60% of his income, which works out to $4,500 a month.
- Now let’s say there’s a woman named Margaret. She’s a CEO, and she earns $600,000 a year, or $50,000 a month. Like Peter, she has a group disability insurance policy from work that pays up to 60% of the worker’s pre-disability income. However, Margret won’t receive 60% of her salary because the policy also has a $5,000-a-month cap. Instead of receiving $30,000 a month in benefits, she’ll only get $5,000. That’s just 10% of her regular income. Adjusting to that wouldn’t be easy – she has a lot of people who depend on her income – so she needs more coverage.
- Low monthly benefit caps are common in group disability insurance policies, and they usually penalize anyone who earns more than about $100,000. As your income rises above this cutoff, the percentage of your income that’s covered by group disability insurance gets smaller and smaller. Some policies have higher monthly limits, but even then, the limits will probably hurt very high earners.
It’s the income protection gap.
Solving the Income Protection Gap
The income protection gap is a problem for top earners. If they have to take a massive pay cut because their disability insurance doesn’t provide adequate protection, they may have to make major changes to their lifestyle, like downsizing to a less expensive house. They may also have other people who depend on them, and they might not be able to support them anymore. These problems are exactly the sort of thing disability insurance is supposed to address!
Luckily, there’s a simple solution. You can layer your disability insurance coverage.
How Top Earners Can Boost Their Paycheck Protection by Layering
If you’re a top earner, you likely have a lot of valuable assets, but your paycheck may be the most valuable asset of all. It makes sense to protect your paycheck the same way you protect your other assets – with insurance.
If you have a house that’s worth $400,000, a homeowners insurance policy with a $400,000 limit may make sense. But if your house is worth $2 million, that $400,000 policy isn’t going to cut it. You need more insurance.
The same basic principle applies to disability income insurance, but instead of increasing your limit or buying a new policy to replace your old one, you can keep your current policy and supplement it with another policy. This is a great way to boost your paycheck protection while maximizing your employee benefits.
There are other benefits to buying an individual disability insurance to supplement your group policy:
- Your individual disability insurance policy is portable. If you switch jobs, you can take it with you.
- Your individual disability insurance policy may offer additional benefits. You can customize your policy with the terms and riders that fit your needs.
How Employers Can Attract Top Talent
If employers want to attract top talent, they need to offer top compensation. The average worker may be happy with a basic group disability insurance plan, but high earners are going to want more.
With the right benefits strategies, employers can make their company more attractive to top workers.
- Guaranteed standard issue disability insurance is a convenient way to cover five or more employees at once. They’ll obtain more coverage without having to worry about medical underwriting, and they can also enjoy a multi-life discount.
- The IRS Code 162 Executive Bonus is another way to provide your top workers with robust disability insurance.
What to Look for in Disability Insurance for High Earners
High earners need robust disability insurance coverage. To make sure your policies will provide enough protection, consider the following:
- What is the monthly benefit amount? Consider how any monthly caps will impact the monthly benefits you take home.
- Are the benefits subject to income tax? Taxes can take out a major chunk of your benefits, especially in the higher income brackets. Group disability benefits are usually taxed, but individual disability insurance benefits are typically not subject to income tax.
- Is your coverage portable? Group benefits are often tied to the job, but individual disability insurance is portable.
- What additional benefits are available? Some insurance companies offer riders that provide additional benefits. For example, you may want a policy with a retirement savings rider that helps you continue to save for retirement during a period of disability.
- What is the benefit period? A policy may provide great coverage, but if the benefits stop after just two years, what do you do after that? Some policies provide benefits until the policyholder reaches retirement age.
- What is the definition of disability? Most policies use either an any-occupation or own-occupation definition of disability. This impacts whether or not you qualify for benefits, so it deserves your attention.
Do You Need to Protect Your High Income?
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