Why Group Long Term Disability Isn't Enough -- Insurance Forum

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Date Posted: Sun, January 18 2004, 17:05:39
Author: Brent D. Gardner, ChFC
Subject:

Why Group Long Term Disability Isn't Enough

Why Group Long Term Disability (LTD) Isn't Enough

One of the most common objections I hear when proposing individual disability income is, "I have it at work." For some people this is true - their employer may offer a group Long Term Disability plan.

However, the problems with group LTD plans are:

-- As an employer-paid plan, the benefits received are taxable.
-- Most have a maximum benefit amount or replacement ratio.
-- Bonuses and commissions are often not considered.
-- They are not portable. So should the employee leave, they can't take the coverage with them.

More on this later.

Let's say you have a mortgage broker who earns a base salary of $25,000. In addition, he earned $50,000 in commissions & bonus. His total income is $75,000 but the group LTD only covers the $25,000.

Base Salary -- $25,000
Group LTD Replacement -- 66 2/3 %
Group LTD Benefit -- $16,665
After taking out 25% for income taxes -- $12,498 <-- Can you live on this?
This is just a 17% replacement of income.

How much can an individual DI policy add? A lot! In this case, an individual policy can offer an additional $2,986 in base monthly benefit. By adding the optional integrated monthly benefit rider (social insurance
substitute), another $625 could be added.

Post-tax LTD Benefit -- $12,498
Individual Policy Base Benefit -- $35,832
Integrated monthly benefit rider (social insurance substitute) -- $7,500
Total -- $55,830 <-- This is a 74% replacement of income

Back to employer provided plans -- why they aren't enough:

1. Because disability income insurance premiums are tax deductible by an employer, the benefits paid to an employee are taxable as ordinary income. What this means is that if you have a plan that pays 66% of salary, a
disabled employee has taken an effective 34% pay cut, at a time when one needs more money than ever before. This is why EVERY working American who cannot retire today should own personal disability coverage.

2. Most group plans have a benefit cap. I know, because I sell employer plans. A common cap is $5,000 per month, although some cap benefits as low as $2,500 per month. If you earn more than what is covered, you have a gap. Many employees are not even aware of this gap, until I find it in the employee benefit handbook and show them.

3. Most group plans have a conservative (read: strict) definition of disability. For example "Inability to peform ALL duties of the insureds OWN OCCUPATION for the first TWO YEARS, and ANY OCCUPATION thereafter." This means two things -- one, you have to be really bad off to qualify, and two, if you can do ANYTHING with your education and experience after two years, you WILL be expected to return to work, because benefits will stop. Insurance companies have special benefits they can add (a rider) to an
individual policy that integrates with this benefit gap, so that if your employer plan doesn't protect your "own occupation" after two years, your personal plan will.

4. The last few years, many employers are cutting benefits. One of the FIRST things to go is employer sponsored long term disability insurance. to combat these cuts, the better agents out there are soliciting business owners and human resource managers to allow them to solicit and sell payroll deduction disability income insurance at the work site.

5. If an employees disability is determined to be permanent (i.e., last more than six to twelve months), the odds are that the employer is going to terminate the employee, and place them on COBRA, or state continuation, for
health insurance purposes. If one is fortunate enough to have an employer who pays part or all of their health insurance, they are in for a rude shock when they see COBRA rates, which are 102% of the ENTIRE premium the employer was paying, PLUS any contributions by the employee. This is why a pay cut during a disability can be devastating.

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go to heaven if you die dumb. Become better informed. Learn from other's mistakes. You could not live long enough to make them all yourself." - Hyman George Rickover (1900-86), Admiral, US Navy, advocated development of nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant (ChFC), designations owned and exclusively offered by The American College, signify the highest standards of academic study and professional excellence in the financial services industry.

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