It was Friday afternoon and Bob's doctor just told him he had advanced Lyme disease. He would be disabled - indefinitely. Bob's financial time bomb was about to explode.
Bob was 48 years old and a successful corporate executive with a $700,000 annual income that included a $400,000 base salary with a $300,000 bonus.
He discovered he was frequently tired and had difficulty focusing on some of the complex analyses his job required. His wife, Carolyn, noticed that his typical high-speed memory and quick wit just weren't there. When Bob went in for his annual physical, he mentioned these symptoms to his doctor, who ordered a full battery of tests, including blood work, CT scan and MRI. Bob then received the devastating news from his physician confirming the Lyme disease diagnosis.
A fairly active person, Bob enjoyed skiing, sailing and working around his beach house. He was somewhat familiar with Lyme disease, having read about it, and knew it was surprisingly common. When detected early, antibiotics can take care of it; however, when left unchecked, it affects the joints and nervous system causing severe pain, fatigue and depression. Unfortunately, there is still no successful cure for advanced Lyme disease, and his doctor advised him the condition would make it impossible for him to handle the mental demands his job placed on him.
o The Plan
Bob also knew 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. Even so, he and his wife, Carolyn, scheduled a meeting with the HR director for the following Monday.
After getting over the initial shock of his totally unexpected medical condition, he and Carolyn began focusing on their significant financial situation. Since becoming an executive, Bob's income had increased steadily over the past eight years, with their lifestyle and expenses following closely the same path.
They had three children, all of them in private schools. Then, there was the large suburban home and all the trappings that go along with it. There was a constant stream of shopping trips and traveling with the kids to fun and exotic places during school vacations. They enjoyed summers at their beach home and were just finishing a new high-end ski condo.
That Monday, they sat down with the firm's director of human resources to discuss the process of initiating the disability insurance benefit. Bob and Carolyn assumed, like so many other executives who find themselves in their position with similar disability income plans, that they would receive a benefit based on 60 percent of his total compensation, $700,000 or $420,000. Bob's financial time bomb had just exploded.
o The reality
It came as a total shock when the HR director explained just how the disability benefit plan worked. She indicated that the company's plan is limited to 60 percent of Bob's base salary, with a maximum of $20,000 per month. Based on the provisions of the plan, Bob was entitled to a $240,000 yearly benefit, a far cry from the $420,000 he and his wife assumed they would be receiving. They were now faced with the extent of their financial loss.
Unfortunately, this disability benefit scenario is tragically common with highly-compensated executives, particularly those with a base salary plus a bonus. Each time this occurs, a Bob or someone in a similar situation asks the same question, "How did the company let this happen? Shouldn't someone have foreseen the shortfall in the disability benefits?"
The irony is that even if someone recognized what would happen if an executive of the company were disabled, there would have been little, if anything, that could be done to change the outcome. It's a simple fact that, in most instances, their income is inadequately protected. This may seem negligent, particularly when 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: the benefit formula and the benefit cap. First, the benefit formula for most corporate group disability plans protects the base salary only and leaves bonus income exposed.
Second, 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, to a combined maximum monthly benefit of $25,000 per month.
o The solution
Fortunately, there's a solution available that makes it possible for executives to avoid having to settle for a highly diminished disability benefit. This can be accomplished by taking a product designed to meet the disability income requirements of highly compensated athletes and entertainers and modifying it in appropriate ways to fit the income objectives of executives. Thus, a new product is created that can give Bob the level of disability income he originally thought he had and what he expected. With his $700,000 total compensation package, the 60 percent figure would be $420,000 instead of $240,000 or 34 percent.
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. However, with the many advances in medical care, these four are no longer the primary killers; they are now the four major disablers.
With improving mortality and increasing morbidity, 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 and has more than 27 years of corporate planning expertise associated with executive benefits. He can be reached at 781-380-1010, gterry@westportgp.com.
Sidebar: Carrier stability even more important in this economy
Group long-term disability insurance is a critically important part of any employee benefits package considering that disabilities occur more often than people realize, and can last for years, according to Barry Petruzzi, second vice president, group life and disability for Guardian Life insurance Co.of America. The Social Security Administration estimates 30 percent of those who enter today's work force will become disabled before they retire, while the National Safety Council notes that a disabling injury occurs every three seconds in public and every four seconds at home.
There is the potential for a long term disability to last until someone reaches retirement age, which can equate to years, or even decades, without a steady pay check. Employers and their employees need to be able to count on their insurance carrier being there if the worst should happen. So what should you look for in an insurance carrier?
Petruzzi believes that there are several key elements that determine an insurer's financial strength. The hallmarks of a strong LTD carrier include a strong capital position, financial stability, conservative investment philosophy, independent recognition, and outstanding customer service with excellent claims paying ability.
Strong Capital Position: In today's economic environment, companies need to be well capitalized to meet financial obligations like paying long term disability claims over an extended period of time.
Financial Stability: Look for a company that has a long track record of providing benefit solutions and claims paying ability.
Conservative investment philosophy: Many companies are distracted by the short-term demands of Wall Street, instead of the needs of their customers. Working with a company that is focused on its customers will ensure that long-term benefit needs are met.
Independent recognition: Work with a company that is recognized as steady and strong by the ratings agencies.
Outstanding Customer Service: When selecting a disability plan, clients want to know that their carrier will be able to meet long term commitments. They also want their carrier to pay claims quickly and accurately, especially in turbulent economic times.
By choosing a stable insurance carrier, employers are in effect insuring the lives of their employees and helping families when they can most use financial assistance, Petruzzi explains. But on a more basic level, they're fulfilling their fiduciary responsibility under the law to secure the best possible benefits for their employees and avoiding a crisis situation.
-- Benefits Selling staff
