Todays Long Term Disability Plans Fall Short For Employees And Executives

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• Todays Long Term Disability Plans Fall Short For
  Employees And Executives!
• September 19, 2003

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Facts About Disability . . .

• Most Americans are better prepared financially to
  die than to become disabled, although the chances
  are 3-5 times greater of a disability occurring.
• A 35-year-old has a 50 chance of becoming
  disabled for 90 days or longer before age 65.
  30 of Americans age 35-65 will suffer a
  disability lasting at least 90 days during their
  working career. One in Seven people age 35-65
  can expect to become disabled for five years or
  longer.

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Facts About Disability . . .

• More than 375,000 American become totally
  disabled every year, and 110 million dont have
  long-term disability coverage. Approximately 8
  million adults have a disability that limits or
  prevents them from working.
• Nearly half (46) of all foreclosures on
  conventional mortgages are caused by disability
  vs. 2 caused by death.
• Typical long-term disability policies cover 60
  of base salary to a maximum of 10,000/mo.
• One year of disability can wipe out 10 of
  savings over ten years.

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Facts About Disability . . .

• Most income earners have spending commitments
  that consume 65 to 75 of normal cash flow.
• Employment rates for persons without disability
  is 80.5 compared with 27.6 for disabled
  persons.
• Social Security Disability payments are limited
  to persons that have sufficient work records.
  The average social security monthly payment if
  722/mo. Disability criteria are so strict that
  only about 35 of applicants qualify.
• Most common disabling conditions Back disorders
  followed by heart disease and arthritis

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Facts About Disability . . .

• Nearly 20 percent of working adults said
  individual disability insurance coverage is too
  expensive
• Nearly one-third of the respondents didn't know
  why they didn't own a policy
• An additional 16 percent said their company plan
  was sufficient
• An alarming 57 percent of Americans believe they
  can remain financially stable for longer than
  three months if they were to suddenly lose half
  their income.

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Disability Income The Forgotten Benefit . . .

• Disability insurance provides for the most
  pressing and immediate protection of all benefits
  in the event of sickness or accident
• Without disability insurance how do you pay -
• Health and life insurance
• Save for retirement
• Pay mortgage payments, taxes, and insurance
• Living expenses
• College tuition
• Waiver of premium Is this sufficient?

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Executive Compensation Competitive?

• Elements of Pay
• Base Salary
• Bonus income
• Stock-based compensation
• Benefits
• Perks

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Executive Benefits - Empty Pockets?

• Benefit disparity between rank-and-file, and
  highly-compensated??
• 401(K) and Defined Benefit Pension Plans??
• 12,000 annual contribution
• ADP/ACP non-discrimination
• 200,000 compensation limit
• Section 415 40,000 or 100 of pay
• Top Heavy Testing
• Family aggregation

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Executive Benefits - Empty Pockets?

• Life insurance??
• Multiple of pay plan or dollar limitation
• Availability of Supplemental and/or dependent
  Life
• Guarantee issue or E of I
• Disability Insurance??
• Income replacement and dollar limitation
• Covered compensation

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Executive Benefits - Empty Pockets?

• In 1989 the typical manager received 70 of total
  compensation as fixed salary.
• By 2000, 40 of total compensation was fixed
  salary.
• Variable pay and salary increases during this
  period have not been reflected in higher LTD
  income caps.

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Executive Benefits - Empty Pockets?

• Disparities between rank-and-file and
  highly-compensated employees are common
• Should Benefit Specialists provide for these
  differences??
• Non-qualified defined contribution plans
• Supplemental Executive retirement plans
• Supplemental life and disability plans

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Executive Benefits - Empty Pockets?

• LTD arrangements often discriminate against and
  create income deficits for management and senior
  executives
• 60-70 income replacement
• For executives income replacement can be much
  lower
• Covered compensation base salary only
• Incentive pay and bonus income represents more
  than salary for many executives
• Salaries for executives exceed the income which
  is protected by group LTD
• Plus - Employer provided benefit taxable income

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Executive Benefits - Empty Pockets?

• Example
• Rank-and-File Employer provided LTD
• Base Salary - 50,000
• LTD Benefit - 60 income (base salary only)
  replacement to 5,000/mo
• Benefit 50,000 x .6 30,000 annual benefit
• After-tax benefit (using 15 federal, 4
  state/local tax rate) 24,300 annual benefit
  48.6 income replacement

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Executive Benefits - Empty Pockets?

• Example
• Executive Employer provided LTD
• Base salary - 200,000
• Bonus income stock-based compensation -
  200,000
• LTD benefit 60 income replacement (base salary
  only) to 5,000/mo
• Benefit 50,000 x .6 30,000 annual benefit
• After-tax benefit (using 15 federal, 4
  state/local tax rate) 24,300 annual benefit
  6.1 income replacement
• Additional income loss 401(k) contributions and
  match, Defined benefit, health insurance, and
  life insurance depending upon company policy

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Executive Benefits - Empty Pockets?

• Dilemma
• Correcting unprotected income of senior level
  people would increase group LTD plan costs beyond
  what the company is willing to bear.
• Few executives put pressure on HR to address the
  issue
• Problem remains invisible and un-addressed
• Unwelcome surprises arise at the time of claim!!!

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Executive Benefits - Empty Pockets?

• There is evidence that LTD is a valued benefit
  when companies offer well-designed voluntary
  supplemental LTD plans.
• Depending on the group offered the benefit,
  between 30 and 45 percent will believe it
  valuable enough to pay for it with their own
  money.
• The risk of disability is increasing due to
  advances in medicine and technology many things
  that use to kill now disable

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Supplemental Disability Widely Accepted and
Growing . . .

• 37 of fortune 1000 companies have installed
  supplemental disability plans for senior manager
  and executives and/or sales force according to
  recent Mercer survey. One of the fastest-growing
  executive benefit being reviewed and offered
  today.

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What Can Be Done??

• Four primary ways to solve reverse
  discrimination
• Include bonus income and stock compensation as
  covered earnings in the existing group contract
  (most insurers will not protect stock-based
  income)
• Purchase individual insurance policies for a
  select group of senior people.
• Add optional group LTD supplemental coverage that
  individuals pay for on their own.
• Add an option that allows people affected by the
  group LTD design deficits, to purchase individual
  portable disability contracts.
• Increases company cost, sometimes significantly.

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What Can Be Done Within Group Plans Possible
Negative Consequences??

• The addition of supplemental group coverage can
  have an immediate or delayed negative affect on
  the pricing of the underlying basic group LTD
  coverage.
• Group-based supplemental coverage can be
  cancelled an action that would bring the
  company back to square one and disappoint
  participants the price may be increased,
  possibly leading to future adverse selection and
  creating an undesired price spiral
• The contract is changeable, potentially leading
  to provisions more favorable to the insurer
  (e.g., recent self-reporting injury limitations
  and use of broad terrorism exclusions)

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What Can Be Done Within Group Plans Possible
Negative Consequences??

• The group-based supplement rarely is portable for
  the executive and, if so, usually is convertible
  to a less-than-desirable trust product.
• The contractual provisions of a group plan are
  not as comprehensive as those of typical
  individual contracts, often including offsets
  from other income sources (e.g., Social Security,
  company retirement etc.).
• Use of corporate negotiating strength allows
  participants a simple and inexpensive means to
  purchase fixed premium, portable, individual
  disability policies.

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What Can Be Done? Individual Plans A Possible
Alternative??

• Though individual policies may be more expensive
  to the executive, factors that can mitigate the
  cost are
• The cost for a comparable retail individual
  disability policy can be 100 more than a
  company-sponsored plan.
• Individual disability contracts have more liberal
  (likely to pay) contractual provisions.
• Such policies have a fixed level and guaranteed
  premium for a participant to age 65.
• The policies are portable, therefore provide
  certainty of coverage at a time when employment
  is less than certain.

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Features of Individual Policies . . .

• Riders provide
• Cash benefits in addition to loss-of-income
  benefits of the base plan
• Emergency accidents
• Outpatient illnesses
• First hospital confinements
• Accidental death or dismemberment
• Life unexpected events
• Building Benefits Benefits that automatically
  increase the benefit period with no additional
  cost for this extra protection each year the
  policy stays in form (up to certain caps usually
  set at 50 additional benefit duration)

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Look for Simplicity . . .

• The best voluntary disability insurance policies
  should possess
• Composite price structure
• Minimal occupation classing
• Availability of guarantee-issue or simplified
  underwriting

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Carrier Considerations . . .

• Sound financial rating, underwriting, pricing,
  and business practices to be a player in the long
  run
• Disability insurance should be purchased with the
  intent to keep coverage long term
• Carriers should demonstrate a commitment to the
  market and have the financial and operational
  infrastructure to be a long-term player

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LTD Restoration Plan Benefits to the Employer .
. .

• Offers the company the ability to provide a
  crucial benefit both inexpensively and with
  little ongoing administrative effort by
  already-taxed HR departments.
• In the current economic environment, supplemental
  individual LTD plans are viewed as an excellent
  way to improve the benefits of top people at
  little or no hard cost.
• The value placed by employees is irrefutable.
  The plans value can- and should be effectively
  reinforced through proper enrollment
  communications.

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Disability Insurance Retirement Protection Plus
. . .

• Disability Insurance for Retirement Plan
  Contributions
• A program that provides disability income
  insurance that ensures that contributions
  continue to be made to your retirement plan in
  the event of disability.
• The goal To provide you with close to what you
  could have expected from your retirement plan if
  you had not become disabled.
• Pay the amount you contribute now plus the
  amount your employer contributes into an
  irrevocable trust
• Separate policy, own-occ, non-cancelable,
  guaranteed renewable
• Maximums apply, typically 3,000 - 4,000 per
  month (including COLA and Future Increase Options
  (FIO) for those who earn more each year).

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Business Overhead Expense Disability Insurance .
. .

• Protects Business Owners Companies During
  Disability
• Pays rent, utilities, taxes, interest on debt ,
  depreciation, furniture rental
• Reimburses owners a fixed percent (50 to 100
  depending upon company risk due to owner
  disability) for each month of total disability up
  to the maximum overhead monthly expense benefit.
• Benefit Periods 12,18, 24 months
• Limits - 200/mo minimum - 30,000 maximum
• Waiting Periods 30,60, or 90 days
• Coverage expires Age 65 with right to continue
  to age 75
• Residual (partial disability) benefits available
• Future Purchase Option Option to purchase
  additional insurance to keep pace with rising
  office expenses