An effective disability insurance program for a company provides the required amount of insurance to each participant at a fair price.
But all too often, we see one-size-fits-all disability insurance plans that fail to meet the needs of the specialized and highly compensated employees who are crucial to a company’s success.
Take the example of a law firm.
While partners, associates, and paralegals all must work in conjunction to creating positive outcomes for the firm’s clients, a reality is that incomes can vary by 10 to 15 times or more from the lowest wages to those of top partners at a firm. This dynamic repeats itself again and again at many business such as in healthcare companies, medical groups, and other professional services businesses.
A standard group disability insurance contract provides many crucial benefits but it doesn’t meet the needs of every employee at a company or firm. And if employees don’t receive benefits necessary for their security, competitors can use better benefits to steal talent away from the company in question.
If this company wants to offer every employee enough disability insurance to replace 60% of their income, they will likely need a combination of strategies. Guaranteed standard issue disability insurance is a solution to offer the strongest disability insurance plan to a company’s highest earners at the lowest possible cost.
Earnings gaps due to group disability insurance
The gold standard for disability insurance is a 60% replacement ratio.
This holds for those making $60,000 a year, $150,000 a year, or $750,000 a year. We require a reasonable amount of cash flow to replace our income if we’re disabled and can’t work due to a sickness or injury, no matter how much we earn.
But with most group disability insurance policies, their design can create a coverage gap for high-earners. Group disability can create coverage gaps in many ways. The two most common situations are discussed below.
How does the benefits formula define earnings?
Group disability insurance pays claims as a percentage of some definition of earnings. Some contracts limit earnings to salary, others include bonuses and commissions. If your compensation is heavily tilted to bonus or commission income, be sure to understand how your policy defines earnings.
You may have a much bigger gap in coverage than you thought.
What is the monthly benefit cap?
The policy will usually state the monthly benefit to be paid as the lessor of X% of earnings or $Y,000. This can leave high earners significantly under-insured if there is a large gap between the benefits cap and their monthly income. If you make $20,000 per month but your insurance policy caps your monthly benefit at $6,000, you have a 30% replacement ratio, half of what’s recommended.
When highly compensated and key employees earn multiple six-figure incomes, but have a disability plan providing 40%, 30% or less in benefits, we have an issue.
To fix this, you can either increase the cap on the group policy or offer a selective, competitive, and valued benefit in the from of guaranteed issue disability insurance.
GSI Disability Insurance
Guaranteed standard issue disability insurance, or commonly abbreviated as GSI disability insurance, provides supplemental coverage in addition to existing group coverage. This coverage is only available to employees experiencing an earnings gap and can be specially tailored to the needs of a subset of the employee population.
The benefits of GSI disability insurance are numerous. Let’s review the most commonly cited advantages it has to group and standard disability insurance.
For high earning employees and executives, group disability insurance may leave a gap between coverage and the income an employee is used to receiving. GSI disability insurance can fill this gap and provide an additional $5,000, $10,000, $30,000 or more as needed by the employees in question.
When we uncover a situation where a company has 20, 50, or 100 employees underinsured for income replacement, we know we can cover the gap with GSI disability insurance.
Multi-life and Unisex Rates
Individual disability insurance policies provide rich benefits and offer great protection and are the gold standard for disability insurance. Unfortunately, they require underwriting and come with much higher premiums when compared to group insurance.
With GSI disability insurance, employees can get the best of both worlds. They receive the benefit of an individual disability insurance policy along with lower premiums due to group discounts.
Of particular note for women is that the rates for GSI policies are usually unisex. With the relatively higher cost of disability insurance for women, unisex GSI disability insurance can be 30% to 50% less expensive than an individual policy for a female employee. This can be of enormous benefit for women who are spending $5,000 or more per year for disability insurance.
One of the biggest advantages of purchasing individual coverage is that as the owner of the contract, you can bring the coverage with you wherever you work, even if you are self-employed.
With GSI disability insurance, you own the policy and if you leave your company, you keep it. Key employees and executives highly value portable benefits like this and can support recruitment of talented candidates.
Key employees and executives commonly experience underinsurance from standard group disability insurance policies. To fill the gap, guaranteed issue disability insurance presents a cost effective solution that grants employees peace of mind knowing they are adequately protected.
Each GSI disability insurance policy is highly customized to the needs and situation of each company. It’s best to work with a team specialized in both employee benefits and disability insurance to pull together the comprehensive solution best for you and your team.