Universal Benefit Plans Blog

Take any group of employees—including highly compensated ones—gather them together to discuss disability benefits, and one thing becomes very apparent: an overall lack of understanding. Starting with our first professional job out of college, all of us are led to believe that our income protection insurance (i.e. disability plan) will pay us 60% of our annual compensation should we become disabled and unable to work.

As a result, top corporate executives, business owners, money managers, lawyers and many other high earners firmly believe that they’re adequately covered. But, as it turns out the 60% figure is merely an illusion; and highly compensated employees especially only come face-to-face with reality once they’ve become disabled.

“60% of what?”

That’s the crucial question that employees should ask regarding their disability plan, and the answer is far more complex when one might think.

There are many items to take into consideration, for example:

• Is the 60% figure, 60% of my base salary only or 60% of salary + annual bonuses (or salary + annual bonus+ long term bonuses)?
• Does the figure include cash compensation only, or are deferred compensation, restricted stock and other compensation included?
• Are benefits taxable or tax free?
• Is there a monthly benefits cap (i.e. $10k, $15k, $20k, etc.)?
• What is the definition of disability?
• Is it the inability to perform your own occupation for two years or to age 65 or is it any gainful occupation? Is it partial disability or total disability only?

After all of the above is said and done, disability benefits can get very complicated. And depending on how restrictive the employer’s plan is, some employees may think they’re covered at 60% but actually end up with a lot less.

Let’s look at an example.

An executive making $175,000 per year with a $50,000 annual bonus goes out on disability for 5 years. While on disability he receives monthly LTD benefits equal to 60% his salary. But what about the bonus? If his LTD benefits were calculated based on W2 income (salary + bonuses and commissions) as opposed to salary only, the bonus would be included.

After 5 years time, calculating benefits on W2 income would make a huge difference as shown in the chart below.

 In addition to calculating LTD benefits from W2 income, small-to-mid size employers can enhance key employees’ disability benefits with added riders such as Cost of Living Adjustment (COLA), a Catastrophic (CAT) rider to protect them in the event of the worst happening and an “own occupation” rider. We’d be happy to discuss all of these enhancements with you. Contact us today and we’ll help you ensure the incomes of your major MVPs are protected fully and so much more.