Group disability insurance is a common and popular employee benefit provided by many companies. While valuable, if you are a high earner, it is likely to fall short in maintaining your lifestyle if you are unable to work in your chosen occupation due to accident, injury or illness.
The most obvious limitation is the income cap, expressed as a percentage of base income, inherent in group plans. For instance, 60% of your monthly earnings to a maximum of $5,000, $10,000 or $15,000 per month. However, depending on the contractual language in the plan, your monthly earnings (base income) may not include commissions, bonuses, or distributions. Highly compensated owner/employees of pass-thru entities like LLCs or S Corporations often receive most of their income as distributions reported on a K-1. Could this be you?
Another shortcoming often found in group disability plans is the definition of disability. Plans that cover highly compensated professionals generally pay benefits for a specified time the insured cannot perform the material and substantial duties of their regular occupation. After that period, the definition of disability can change to the inability to perform the duties of any gainful occupation for which you are reasonably qualified by education or training. For example, if you are a specialized surgeon, attorney, or software engineer whose disability extends beyond the time certain stipulated in the group contract, you may need to jump through a new claims qualification hoop to continue receiving benefits.
There are ways to address these and other issues found in group disability plans:
1. Have a clear understanding of the details of your existing group plan. Blaze ‘n Bear Insurance Services provides a complimentary review of your current group disability plan and will identify shortcomings you may be able to address with your existing carrier.
2. For highly compensated executives and key employees whose income exceeds the group maximums, and for those with income that does not fall into the basic income definition of the group disability contract, the employer can sponsor a “carve-out” plan that will fill the gaps. These are usually individual policies issued on a simplified and discounted basis for five or more employees, that do not contain the limitations of group disability plans. These supplemental policies are also portable should the employee move on to another job.
3. If the employer does not wish to sponsor a carve-out plan, individual employees may wish to consider purchasing a supplemental plan in order to fulfill their own personal needs.
As I pointed out in my April 15, 2022 blog, our lifestyles generally expands with our income. If that income is impaired due to illness or injury, tough choices may need to be made. Planning for this eventuality is a critical element of your long-term financial well-being.
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