by David Kates, Lenox Advisors
Employee benefits professionals should be aware that while their company’s top executives are well protected via their life insurance coverage and retirement plans, these same executives could be woefully exposed in their disability insurance coverage. Often, a company’s top earners have coverage that isn’t up to the task of protecting them if a disability prevents them from working.
This is generally because the limits of corporate disability insurance programs create a “coverage gap” for top-earning executives. So your company’s most valuable executives, those responsible for much of its earnings (say, top traders at a financial firm), could actually have the weakest disability insurance coverage in the entire organization.
Benefits departments often discover that they have a hidden population within their company—the most valuable performers, yet the least protected in the event of disability. Top executives can be in the dark about this situation, and that’s potentially disastrous.
After all, disability is far from a negligible factor—the average 30-year-old worker has a one-in-three chance of being disabled for more than 90 days, according to research by the American Council of Life Insurers.
The typical problem is that disability insurance programs are designed to serve the majority rank-and-file employees, so that coverage in the event of a disability is usually around 60% of an employee’s current pay, with a monthly or yearly salary cap. This cap is the hidden snare for high earners.
For example, take a new CFO who, having glanced at his disability insurance paperwork upon getting hired, assumes that he will receive 60% of his current salary in the event of a disability.
However, say that his coverage is capped at $10,000 a month; this means the coverage protects only 40% of the CFO’s monthly take-home compensation.
This hidden imbalance is a quiet crisis waiting to happen, but it’s also a crisis that benefits executives can solve quickly, easily, and with no additional expenses. Benefits executives who go on the offense to discover and redress their top earners’ disability-related shortfalls will put their companies in a far better position.
Benefits departments can solve the crisis without taking on a host of new duties by selecting a financial advisory firm to work with top executives and enable them to choose an employer-endorsed, voluntary, discounted, and individually owned disability coverage program.
These supplemental programs enable executives to fill any holes in their disability coverage. Even better: The programs do so without adding new administrative burdens to the benefits department, and the programs also won’t create additional expenses for employers.
Basically, benefits executives should first select an experienced financial advisor that has contacts with highly rated insurance carriers.
Once endorsed, these financial planners will speak to executives, researching their disability plans and discovering if there are any gaps in coverage. Then these financial planners help executives to customize a discounted supplemental disability coverage plan. The result: Benefits departments can address their executives’ disability coverage gaps without having to dedicate any additional time or resources.
Closing the Gap
That said, benefits professionals should regularly communicate with their company’s endorsed advisor and should keep in mind the essential points of getting top-earning executives up to speed in their disability coverage.
Privacy. Just as educating your company’s top executives as to the state of their disability coverage is the first goal of the process, benefits professionals should remember privacy is an essential ingredient.
One great benefit of using endorsed financial planners is that benefits professionals thus avoid a common mistake—addressing their company’s disability coverage solely in companywide mass meetings.
The last thing that a high-earning executive wants to do is publicly disclose his salary at a meeting attended by the rank-and-file employees. Yet, when benefits departments offer only one cattle-call meeting for the entire firm to discuss disability insurance coverage, that’s exactly what advisers expect executives to do.
Unsurprisingly, high earners tend to either avoid the mass meeting or keep mum during it, even if they’re concerned about the adequacy of their own coverage.
Instead, benefits executives should ensure their key executives have face-to-face meetings with financial planners, behind closed doors, so that the executives feel free to divulge their salary and can ask whatever pertinent questions they have.
To encourage an in-depth, free-flowing conversation, benefits professionals should ensure their planners work around the executives’ schedules (for example, if your company is a financial firm based on market trading, meetings should be held after trading hours, such as between 4:30 and 6:00 p.m.).
Once these executives get up to speed about any shortcomings in their coverage, they can then design their own supplemental plans.
The two key factors that benefits executives should be sure their financial planners emphasize are portability and easy customization.
Portability. Given the economic volatility of the past few years and its impact on the corporate world, executives, like many employees, are concerned about the stability of their positions.
Yet, while executives have ensured they can take their retirement packages with them wherever they go, they often face the prospect of losing their current disability insurance upon switching jobs.
Benefits professionals can help reduce their top earners’ concerns by emphasizing that a portable guaranteed-issue policy will be the executive’s property and, so, will move wherever the executive goes.
Certainly, employers don’t want to encourage their top earners to look elsewhere. It may seem like a paradox, but executives are more likely to stay put at a company if they are convinced that the employer has been looking out for their best interests.
In fact, according to the 8th Annual (2009) MetLife Study of Employee Benefits Trends, 62% of employees who have financial planning services through their workplace are very satisfied with the benefits they receive through their employer, compared with 42% overall.
Moreover, in a significant increase over the past 2 years, 58% of employees (up from 30% in 2007) would like their employer to provide access to financial planners to help them make decisions about financial needs.
Easy customization. The other thing benefits professionals should make sure their executives know is that supplemental disability insurance programs don’t have to fit into any specific model. There’s no mandate forcing executives to immediately fill the entire gap in their coverage.
Say an executive needs to contribute an additional $2,000 in premiums so that she can get the full 60% of her current salary in the event of disability, but she only wants to contribute $1,000 at present. That’s not a problem. Structure the supplemental plan initially to provide partial coverage, while giving the executive the option of increasing her coverage in the future (for example, the executive could have the option to change coverage on a yearly basis).
A Win for the Company, Too
Certainly, a benefits department’s primary objective is to ensure that top executives are up to speed on their disability coverage and to fill in any existing gaps in coverage.
However, sometimes this education process can also generate substantial savings for their company.
For example, a benefits professional may determine that the company’s disability coverage is indeed fully compensating even its highest-earning executives. That’s rare, but if so, this likely means the employer is paying out a great deal in annual premiums.
And, if a benefits director also notes that there’s a large numerical imbalance (say, a company that has five top earners and 95 lesser-compensated employees), they could suggest that their company move the rank and file down to a program with lower caps and a lower group premium. Then benefits professionals, via their endorsed financial planners, can enable their executives to close any gaps this move creates in their coverage by selecting new individual disability programs.
Crisis Solved
As most benefits professionals well know, disability insurance typically isn’t a top priority for many employees, let alone busy executives who are charged with controlling a company’s future.
Having inadequate disability coverage, however, can be a very costly mistake.
If a disability occurs, an executive could find that his assumptions are completely at odds with the reality of his coverage.
Benefits professionals should consider using an experienced and reliable financial planner, first to educate executives as to any disability coverage shortcomings, and then to help craft supplemental insurance programs.
This way, benefits professionals can solve the quiet crisis in disability insurance coverage without racking up any additional costs or taking on a host of new responsibilities.
It’s a quick and painless way to ensure that your company’s top executives achieve the level of protection that, in many cases, the executives assumed they already had.
David Kates is a senior vice president at Lenox Advisors, Inc. (www.lenoxadvisors.com), who is responsible for working with both individual and corporate clients of the firm.
He specializes in providing those clients with comprehensive, integrated solutions regarding wealth management, estate planning, and employee benefits strategies.
Lenox Advisors is a wealth management firm with more than $1.2B in assets under management.
With offices in New York City, Chicago, San Francisco, and Los Angeles, Lenox Advisors serves as a single-source wealth management firm for successful executives, professional athletes, and celebrities.
Lenox Advisors provides oversight and strategic management for every aspect of a client’s financial life.