Many employers provide valuable Group Long-term Disability (LTD) coverage to their employees. The monthly benefit this coverage provides is a great foundation for building an income protection program, however the group plan, on its own, may not provide adequate coverage in the event of an injury or illness.
By design, Group LTD plans typically protect up to 60% of an insured’s base salary and usually have a monthly benefit cap in the range of $5,000 to $10,000. Additionally, if the Group LTD premiums are paid by the employer, the benefits received are considered gross income and therefore subject to regular income taxes. The actual benefits received from a Group LTD plan can be far less than you might think. As an example, assume an annual income of $80,000, a 28% tax bracket, and a Group LTD benefit of 60% up to $5,000 per month. In the event of a claim, the insured would receive $2,880 per month after taxes, or only 43% of their gross earnings. Not many people can afford to take that type of pay cut!
Highly compensated individuals need to be especially wary of Group LTD plans, as they will often find that their earnings exceed the LTD’s built-in monthly payment cap. This results in a plan that effectively discriminates against the highly compensated. Think about it this way: a Group LTD plan that covers 60% of income with a $10,000 per month benefit cap is only protecting 40% of a $300,000 annual salary….. Ouch!
It’s also important to note that some Group LTD plans often don’t cover bonuses, incentive compensation, or earnings from a K-1, and are offset by any benefit received from Social Security or workers’ compensation, further reducing the benefits received. Owners of S-corps and individuals who receive incentive compensation need to be especially aware of this potential shortcoming.
Lastly, Group LTD plans can limit the time benefits are paid to just two years if the insured cannot perform his or her job duties. Thereafter, insureds need to prove they can’t perform the main duties of any job for which they can be expected to do, based on their training, education, or experience in order for benefits to be paid. Finally, group coverage is typically not portable, meaning that insureds cannot take the coverage with them should they decide to change jobs.
Group LTD can provide the foundation for building a comprehensive income protection plan. Supplementing group coverage with individual disability insurance helps fill Group LTD’s income protection gaps by providing tax-free benefits, increased benefit amounts, no benefit offsets, strong contractual language, and portability.
Click here to view a consumer-friendly video that offers concise details about the shortcomings of Group LTD. Be sure to contact our Marketing Department by clicking here to request an informative white paper that covers these inadequacies in depth and provides you with effective strategies to offset their disadvantages. As always, feel free to call our office for more information on how to design income protection plans around Group LTD.