Optimizing Income Protection Insurance for Highly Compensated Employees

Raffa Financial ServicesRaffa Financial Services on 03/29/2018
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Guest blog content provided to Raffa Financial Services by Daniel G. Aceti CLU, ChFC at Executive Benefits Group

Providing competitive benefits to attract and retain executive leadership has never been more important than it is today. But keeping the people who keep you in business can be easier said than done. How can you encourage high caliber executives to stay the course?

Your key employees are not simply looking for a pat on the back. They want to see, in tangible financially driven ways, that you recognize and appreciate their efforts in making your company a success. Higher pay, however, is not the only answer. Increasingly, companies recognize the need and cost effectiveness of providing supplemental benefits to their highly compensated employees (HCE).

An opportunity for improvement

Most employers provide Group Long Term Disability (GLTD) insurance to their employees. GLTD provides a solid foundation of coverage but typically underserves HCEs due to caps on benefits and the exclusion of bonus compensation as covered income.

Example: A typical GLTD plan will provide 60% salary replacement with a benefit cap of $5,000/month. This plan provides a uniform level of protection for lower paid employees, but any employee with a salary greater than $100,000/year will receive less than 60% salary replacement. Additionally, executives typically receive a greater percentage of their compensation in the form of bonus income as compared to non-executive employees. Excluding bonus income from the GLTD plan further reduces the level of protection provided to the HCEs.

The natural assumption to solve this problem is to increase the GLTD plan limits. This can work to a point. However, it can also be suboptimal. Increasing a GLTD plan’s benefit limits in order to cover a very small percentage of a population (HCEs are typically less than 2% of the overall) places claims experience pressure on the entire GLTD plan and can create material pricing inefficiencies. Additionally, most GLTD carriers have retention level limits. This means they must go to reinsurance markets for any risk above a certain benefit level (ex. $9,999/month). This eliminates their profitability above those limits and their pricing reflects that.

The Solution

The better solution can be to supplement GLTD plans with individual disability insurance (IDI) policies. IDI policies are written on a small select population of executives and increase the benefit limits over and above the GLTD, without having to distort the risk profile of the GLTD plan.

Plan design, eligibility, and benefit levels of a supplemental IDI plan can all be customized, and higher risk levels associated with high-limit benefits are kept out of the GLTD plan. This “spike risk transfer” can have the effect of reducing GLTD premium rates in the near term by lowering the plan’s risk profile and increasing competition (because a greater number of GLTD insurers will compete for the business) and in the long term by truncating spike claim risk and stabilizing overall claims experience.

In addition to increased benefit levels, providing disability protection through supplemental IDI programs is attractive to HCEs for the following reasons:

  • Portability – IDI policies are permanent and portable. This allows the executive to take the protection with them if they leave the company.
  • Premium Discounts – Employer provided IDI plans include significant premium discounts that are also permanent and portable.
  • Contract strength – The most important element of a disability policy is its definitions. The definitions in IDI are stronger than GLTD and are more appropriate for HCEs.
  • Guarantees – IDI policies are guaranteed to never go down in benefit, and to never go up in cost.
  • Underwriting Concessions – Employer provided IDI policies are offered on a guaranteed issue (GI) basis. This means there are no medical exams, no ratings, and no exclusions.
  • Convenience – The GI application process is exceptionally convenient: one-page simplified application, no medical or financial underwriting, and one-on-one expert income protection consulting.

Conclusion

Finding creative and cost-effective solutions to problems requires looking at them differently and identifying unique opportunities for optimization. Aggregating disparate subpopulations in your organization, for the purpose of creating bespoke benefit solutions, can be both incredibly effective as well as highly efficient.

For more information on this issue, read Why You Need to Think About Disability Insurance. Subscribe to this blog for regular updates on a variety of HR and business topics.

 

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Written by Daniel G. Aceti CLU, ChFC, Managing Principal, Executive Benefits Group

Dan has worked in the insurance industry for over 30 years. He specializes in providing innovative executive benefit solutions and disability insurance protection for corporations, hospitals, universities, and thousands of individuals throughout the United States.

 

Executive Benefits Group is a strategic partner of Raffa Financial and provides comprehensive executive benefit consulting and fulfillment with a nationally recognized Income Protection practice. A process-oriented team with over 90 years of experience, our decision support services range from benchmarking and financial analysis to establishment and administration.  

 

Photo by Sergey Nivens

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