Disability Insurance

For Jim, a 50-year old CFO for a large pharmaceutical company, Monday morning was like any other morning as he prepared for the weekly meeting about to take place. He reflected on how well his personal life was going (married for 25 years with two kids in private school) and his professional life (on the fast-track and pulling down a $750,000 annual income that included a $400,000 base salary plus a $350,000 bonus.)

Yes, Jim felt very happy about his life—right up to the point he discovered he was unable to pick up the pen on his desk and that the side of his face felt numb. Jim was in the throes of a full-blown stroke, one that might disable him permanently. And the collateral damage, one that he never had time to think about as he tried to dial 911,was that he was also in the midst of a financial meltdown.

The diagnosis was that Jim would survive his attack, but be unable to return to work. Still, there was some solace in the belief that his company had a disability insurance plan and somewhere in the back of his mind, he recalled reading something about it covering 60 percent of his income. With such protection, he wasn’t overly concerned with the financial implications of his disability as he later met with the HR director to discuss initiating disability benefits. Since becoming an executive, Jim’s income had increased steadily over the past eight years, with his family’s lifestyle and expenses following closely along the same path.

Jim assumed, like so many other executives who find themselves in this position with similar disability income plans, that he would receive a benefit based on 60 percent of his total compensation, or $450,000.

It came as a total shock when the HR director explained just how the disability benefit plan worked. He indicated that the company’s plan is limited to 60 percent of Jim’s base salary, with a maximum of $20,000 per month. Based on the provisions of the plan, Jim was entitled to a $240,000 annual benefit, a far cry from the $450,000 he and his wife assumed they would be receiving. They were now faced with the extent of their financial loss and the impact it would have on their lifestyle.

This disability benefit scenario is common with highly compensated executives, particularly those with a base salary plus a bonus. It’s a simple fact, in most instances their income is inadequately protected. It’s the bonus income that falls by the wayside. The single largest financial exposure an individual faces is the inability to earn an income due to a long-term disability caused by an accident or illness.

The causes of the problem are two serious limitations of employers’ group disability insurance plans: first the benefit formula and second the benefit cap:

The benefit formula for most corporate group disability plans protects the base salary only and leaves bonus income exposed.

The maximum monthly benefit caps are essentially the same as they were 15 or more years ago, even though incomes have increased dramatically. This disparity exists since insurance carriers are not interested in taking the additional risk of increasing group coverage sufficiently to protect high-income earners.

Traditional supplemental coverage is available in conjunction with the group coverage but, in most cases, only to a combined maximum monthly benefit of $25,000 per month.

There are products available that can protect income of highly compensated executives and deliver the level of disability income they had originally thought they had, such as a total compensation package ($400,000 base pay and $350,000 bonus), which would result in the 60 percent figure being $37,500 per month, instead  of $20,000.

Without question, one of an individual’s most important assets is the ability to earn an income and enjoy a lifestyle and financial security that accrues from that income. If the income source either stops or becomes drastically impaired by a disabling injury or illness, the net result can be more financially catastrophic than death.

It’s interesting that, until quite recently, the four major killers were hypertension, heart disease, cerebrovascular disease (stroke) and diabetes. With the many advances in medical care, these four are no longer the primary killers; they are now the four major disablers.

Improving mortality and increasing morbidity means the focus has shifted to managing the risk of income loss due to a prolonged inability to work. While there have been effective disability income plans for most Americans, only now has it become possible to mitigate the income risk where highly compensated executives find themselves today.

Gary F. Terry is executive vice president and managing director of The Westport Group in Braintree, Mass. and one of the developers of the “Executive Income Assurance PlanSM,” a proprietary disability income plan designed to protect highly compensated executives. He can be contacted at gterry@westportgp.com.