When It Comes to DI, More Is Certainly Better
Supplemental, high-limit disability benefits have been available to higher-income clientele for decades. Excess disability plans are traditionally sold on an individual basis. However, in recent years, excess disability products have become available in the multi-life and group guaranteed-issue markets, providing the advantageous ability to reduce or even eliminate underwriting altogether while at the same time increasing discounts up to 30% over individual disability rates.
Department of Labor experts suggest that a sufficient amount of disability insurance occurs only when 65% of an individual’s income is covered, regardless of earnings level. Through open logic, a person who makes $750,000 per year probably has a more expensive home than a person who makes $75,000 per year, but the percentage of income dedicated to the mortgages of those two remains relatively constant. When we consider disability insurance for these individuals, reverse financial discrimination becomes evident; as income figures increase, carriers of traditional individual and group disability plans drastically decrease their participation limits. Those making more money receive proportionately less income protection.
Here is a true, but startling example of the shortfalls of group and individual long-term DI:
XYZ Company has 150 employees. Most of the employees make approximately $75,000 per year. The 10 executive members of the firm have annual incomes of $500,000 (salary) and $250,000 (bonus) for a total annual compensation of $750,000. Their group disability plan covers 65% of income, up to $10,000 per month. Employees at the $75,000 level will receive $4,100 per month in benefits in case of a disability claim. The executives will receive a maximum benefit of $10,000 per month because of the cap on the group plan. To add insult to injury, group plans don’t count income funneled into pension plans. Using the 65% rule for proper coverage, the executives should have disability benefits of $40,600 per month. There is an obvious shortfall of $30,600 per month in adequate disability protection. If one of those 10 executives were to become disabled, they would be at serious risk of falling into financial hardship, even bankruptcy.
We have already established that group insurance is likely sufficient for rank and file employees of XYZ Company, but not so for the executives. Now let’s consider adding a traditional, non-cancellable or guaranteed-renewable plan to the underlying group coverage of those 10 executives. Based on $750,000 of annual income, in a best case scenario, traditional individual DI products will cover up to $30,000 per month, less the $10,000 group coverage. Thus the total benefits XYZ Company executives stand to acquire would be $30,000 per month ($10,000 group and $20,000 individual). Well this is far better. This is more – more coverage and more protection. However, this is still not adequate as the important 65% rule mandates $40,600 per month. There is still a monthly shortfall of $10,600.
Since all 10 of the executives are still underinsured and need more disability benefits, an excess guaranteed standard issue (GSI) plan is the answer. It can be layered on top of the existing group and individual plans, covering the gap of $10,600 per month for those 10 executives.
Excess GSI insurance is not designed to replace group or individual disability policies. It was developed and is used to provide more benefits to those with incomes high enough to lack adequate disability coverage.
Don’t your clients need and deserve sufficient financial protection? Petersen International can save your clients and their companies time and money. Call us today at (800)345-8816 to learn more about the most prolific and modern excess GSI plans in the industry.