If you are an employee benefits broker who knows your clients have a shortfall of income protection, you have probably heard a very common question: “Why can’t we just increase the group long-term disability benefit amount?”
At first, a larger benefit package may seem like the easiest option. However, it is rarely the best option.
To help you understand why, here are five reasons why increasing the group long-term disability (or LTD) benefit amount is not always the way to go:
Reason #1—Exposure to higher premiums
First and foremost, the merits of a benefits increase depend on the starting point. If we’re starting from a $5,000 monthly LTD benefit maximum, increasing the monthly benefits amount may make sense. But for some who already have a $15,000 to $20,000 monthly benefit amount, increasing the group maximum usually creates exposure to volatile premium rates in the future.
Why? Because group LTD plans are rated on experience or claims history. Someone who earns $5,000 per month is a relatively small claim for an LTD insurance carrier. However, a monthly benefit of $20,000, or $240,000 per year, represents a significant loss against the company’s claims experience.
Reason #2—Unexpected consequences
Hypothetical disability scenarios rarely contemplate the effect overlapping claims can have on the employer’s experience rating. When multiple executives go onto disability around the same time, the high cost to the insurer can dramatically inflate the employer’s experience rating, with higher future premiums as the result. In some situations, the insurer may even refuse to renew the employer’s coverage if its LTD benefits are prohibitively high.
Reason #3—Limited flexibility
Having a larger group LTD benefit can create another significant problem: fewer choices. An obligation to support a high LTD insurance benefit will limit the employer’s options to switch insurance companies. Some insurers may not agree to carry a high benefit cap, especially if the employer’s experience rating is already raising red flags. This can lock the employer into an expensive insurance arrangement
Reason #4—Inequities abound
Simply put: Group LTD often works well for rank-and-file employees, but the value becomes less clear at the top end of a company’s pay scale.
This raises an important question: Why would an employer even want to increase their group disability benefit amount at all? The main reason is often to address the higher-income earners within the organization: VPs, leadership teams, and individuals making key revenue impacts to the employer. However, Group LTD benefits alone often can’t completely address the income needs of employees at the executive level. Most base LTD policies fail to include incentive compensation, proper occupation definitions, and portability.
Reason #5—Pre-existing conditions
Long term disability benefits often become a priority once an individual begins dealing with an illness or injury. They’re fine to continue working for the time being, but they realize their health (and their income) are more fragile than they previously thought. If at the executive level, they’ll usually petition for stronger LTD benefits once they’re aware of the current shortfall.
Having been witness to this storyline on multiple occasions, it’s critical to be aware of the new pre-existing condition clauses applied to Group LTD benefit increases. Normally these limitations only apply at the beginning of a new Group LTD policy, but they also appear when a company requests to increase their LTD benefit. The new, increased benefit amount will have a new pre-existing condition exclusion that prevents any employee from receiving benefits for an illness or injury they were previously treated for. These limitations are limited to a specific period of time and only the amount the benefit was increased, but it’s an unnecessary exposure that’s generally discovered once an executive’s claim has been denied.
In addition to all these points, you’ll find that the contractual language between group and individual contracts is significantly different. This may include the definition of “disability,” the contract ownership, the premium stability, and even the taxation of benefits.
For more exhaustive lists of details you can find my analysis of group and individual in the article available here.
The bottom line is this: Increasing Group LTD benefits can be a great short term fix, but it rarely serves a company well in the long term. In most cases, it makes more sense to offer a guarantee-issue individual policy option for executive level employees for whom the group LTD plan will not be sufficient.
Whether you’re an employee benefits broker wanting to learn more about LTD strategies, or you have a current client requesting an LTD increase, Robert Clark can help. He works closely with benefits brokers to ensure they’re protecting themselves and their clients by thoroughly understanding all income replacement options.
To learn more, contact Robert today.