Very high-income earners, such as Law Firm Partners, hedge fund, financial professionals and business owners, are extremely vulnerable should they suffer a disability. This occurs because Group Long-Term Disability (LTD) plans and Individual Disability Insurance (IDI) have combined issue and participation limits that leave the very highly compensated professional exposed.
While lower paid employees receive a full 60% of their pre-disability earnings should they become disabled, the very highly compensated professional receives significantly less than 60% of their income creating a reverse discrimination scenario. The higher the income, the less protection.
The Problem
Why are rank and file employees protected while very high-income earners are not?
1) Group Long Term Disability (LTD) plans typically cover 60% of an employee’s pre-disability earnings up to some predefined monthly maximum. Assuming a plan has a group LTD plan for executives with a $12,500 monthly maximum benefit, an employee earning $250,000 per year would receive the maximum monthly benefit of $12,500 should they become disabled ($250,000 / 12 months is $20,833 of monthly income). Therefore a 60% disability benefit is $12,500 per month ($20,833 * 60% = $12,500). Anyone earning $250,000 or under per year would receive a full 60% of their pre-disability earnings, the maximum benefit. Conversely, the higher the income above $250,000 the lower the percentage of disability income being covered.
2) Individual Disability Insurance (IDI) is placed in conjunction with a Group LTD plan to provide protection above the group LTD plan. While this increases the amount of protection for high income earners there is a limit to which the insurance carrier will write group LTD and IDI coverage leaving the Very High Income Earner unprotected.
As a result of these issue and participation limits, highly compensated executives, attorneys and other professionals are receiving a benefit significantly lower than 60% of their total income. This results in reverse discrimination. The higher the individual’s income, the lower the percentage of their total income that is being protected in the event of a disability.
The Solution
A High Limit Disability Insurance (HLDI) policy is a non-traditional policy that is written on top of existing group and individual disability coverage to cover very highly compensated professionals. A HLDI policy fills in the difference where traditional group and individual long term disability policies end and the amount of coverage the professional needs. HLDI policies can be purchased to cover professionals whose incomes are well into the seven figure range. No combination of group long term disability and individual disability policies can come close to providing the necessary coverage, hence the growth of the HLDI market.
Highlights
Own Occupation
HLDI policies use the best in class “Own Occupation” definition for disability. If you are unable to perform the material duties of your occupation this definition means you’ll receive a benefit, regardless if you can work in a different occupation. Compare that with the traditional “Any Occupation” definition of disability. “Any Occupation” policies will not provide a benefit if you are able to do any sort of work. This is especially important for professionals with a specialized skill or those that have spent many years building their business.
Lump Sum Benefits Available
In addition to the typical monthly payout, these plans can be written with a Lump Sum Benefit in the case of disability. Lump sum benefits can be paid immediately or once the monthly benefit period has ended. These lump sums can provide instant cash for those with the majority of their assets in real estate, other illiquid investments.
Voluntary, Employer-Paid, Individual or Group
HLDI can be offered in a wide variety of situations. For groups, plans can be designed as an employer paid benefit or as a voluntary benefit (employee-paid) for a specific class of employee and/or executives. Group plans may also offer limited to no medical underwriting, discounts and complete portability should the employee or executive leave the group. Coverage is also available on an individual basis for personal use, Buy Sell agreements or Key Person protection.
Financial Leverage
HLDI offers very high income earners a tremendous amount of leverage for their premium dollar. Most policies are purchased for a fraction of a penny for every dollar in coverage.