While a majority of companies believe it's important to offerlongterm disability insurance, critical gaps in policies foremployees are common, according to The Employer Perspectives onDisability Benefits Study, jointly released this month byMassachusetts Mutual Life Insurance Co. and The AmericanCollege.

More than two-thirds (71 percent) of the benefits managers from316 out of 3,000 of the largest U.S. companies said that grouplong-term disability insurance plays an “extremely or veryimportant” role in their firm's overall benefits offering, thestudy showed. However, only 60 percent of employees' base salary onaverage is covered by their group long-term disability program.

Moreover, only 27 percent of respondents said that theirprograms included employee compensation from bonuses and commissionincome, which often leaves high-earning employees unprotected to asignificant extent once they become disabled. “More and moreemployers are including bonus compensation as part of the overallpay package, and so this issue is becoming even more important,”says Tracy Shaw, an assistant vice president at MassMutual.

The absence of this protection combined with the limited payoutof base salary can leave a significant gap for employees, Shawsays. For example, 60 percent of an annual income of $50,000 a year— after taxes — would be just $22,500 a year. “Cash flow is cashflow,” she says. “It's what supports your family, your communityand your care for your disability.”

In general, disability payments tend to be lower than anemployee's pre-disability income, otherwise, employees may notreturn to work as soon as they are able. However, monthly livingexpenses when one is disabled might actually increase due tomedical costs. In most cases, the benefit is taxable — furtherreducing the amount an employee would receive.

Additionally, while 61 percent of firms have $10,000 or more asa maximum monthly benefit amount, only 28 percent offer $15,000 ormore as a maximum benefit. Less than a third of the companies inthe study offered additional insurance to cover the gap in incomecoverage. Twenty-five percent offer “buy-up” coverage within theirgroup plans.

The additional premiums for these plans are typically paid forby the employee, and usually with after-tax dollars. The plans withthe smallest monthly benefit base tend to offer the largestbuy-ups. For almost half of companies offering buy-up coverage, themaximum monthly benefit is $15,000 or more with base and buy-upcoverage.

The study found that employees might still find themselvesunderinsured even with buy-up coverage. Few companies (15 percent)responding to the study offered employees the option of individualdisability income insurance coverage to supplement the group plan.Of those, one in five have implemented the offer.

“Many employers have the misconception that these plans would becostly and there would be administrative burdens,” Shaw says.“However, insurers like MassMutual can offer 'multi-life'supplemental plans to eligible individuals through their employerat a discount off unisex rates, where there is no distinction inrates between male or female.”

There also tends to be little or no administrative burden, asmany insurers take care of the administration of the supplementalplans themselves, Shaw says. For example, MassMutual is slated toenhance its web-based tool, e-Worksite Solutions, to better serveemployee groups as early as next month. Employees enrolled inexisting MassMutual disability income insurance programs at theirworkplace can learn about the supplemental plans on the websiteservicing their program and apply online or by downloading a paperapplication.

“Another misconception is that employees can get this type ofinsurance on their own,” Shaw says. “They can, but they generallythen have to pay non-discounted rates and have a full medical exam— with multi-life plans available through the workplace, there isminimal medical underwriting.” Policies offered within multi-lifeprograms through an employer are also portable, another featurebeneficial to employees.

For increased protection, employees can select riders forcatastrophic coverage and/or retirement contribution protection tohelp build a more comprehensive income protection plan, accordingto Shaw. Although more than half of the companies surveyed evaluatetheir group plans annually, only a quarter are considering makingchanges to their program in the future, the study showed. Duringinterviews with the study's researchers, a number of respondentsvoiced concerns about their gaps in coverage.

“We care about our employees so we will look at supplementalprograms and how they will positively impact employees,” said anexecutive director of human resources at one firm. “If they'regetting 60 percent of their base salary, after taxes they'reprobably getting 40 percent, so they're really not getting anadequate replacement ratio,” said a manager of global benefits atanother company. “It's hard for people to live on 60 percent oftheir salary,” said a senior director of human resources at atransportation company.

“At only 60 percent of salary, I would have a hard time payingmy bills. It's my personal thought,” said a benefits manager at auniversity. “We have people that just wouldn't benefit by thatamount. They'd be left short,” said a benefits manager at a majorfurniture manufacturer. Shaw said comments like these represent anopportunity for insurers as well as insurance agents and benefitsconsultants.

“Brokers and consultants should get employers to trulyunderstand the concerns and how to make their offering morerobust,” Shaw says. “Many times that can be done on a cost-neutralbasis with a buy-up or offering individual coverage throughmulti-life programs, so the premium cost is born by employees.”Comprehensive online education, application and administrationsystems to reach and educate more employees across the U.S. and toease administrative efforts for employers are also available, Shawsays.

Allen McLellan, associate dean of academics and assistantprofessor of insurance at The American College, said that it wassmart that MassMutual partnered with his educational institution todevelop a non-biased study of the issues surrounding gaps inexisting disability insurance programs. “A lot of time companiesconduct studies on the types of  products they sell don'thave that much credibility — it comes across as justification for asales pitch,” McLellan says.

“In this case, MassMutual teamed with us to sponsor the studyand then got a separate and independent group to actually conductit.” The study was conducted by the Boston Research Group, astrategic market research and consulting firm specializing in thefinancial services industry. The firm reached out to 3,000 of thelargest companies in the country based on sales revenue, from asample list that was provided by Dun & Bradstreet.

“The study had telephone interviews with HR managers, so theresponses were quite in-depth,” McLellan says. “That technique,while expensive, makes the results far more effective.” Interviewswere conducted in 2010, between July 26 and Sept. 24. “Some of theHR folks in their interviews cited that they were dying to knowwhat was happening with their peers,” Shaw says. “As the economyimproves, everyone will be scrambling to keep top talent, and sothey want to make sure they are offering benefit offeringscomparable to their peers.”

McLellan says Fortune 500 companies tend to have pretty robustdisability income plans for their executives because they have moreassets to attract more high earners. Even so, gaps can be found inmany of their plans. To be fair to employers, McLellan explainedthe reasoning why group longterm disability plans generally do notcover bonuses: An employee may make $100,000 in one year due inlarge part to bonuses for a well-performing year, but the next yearthe employee may not get a bonus due to a bad economy, and socompanies would be paying too much in premiums in off-years ifbonuses were part of the standard GLTD premiums.

“So typically companies simplify things and to keep premiumspredictable and consistent, they don't fluctuate year to year basedon additional income,” he says. The trick for insurance companies,agents or benefits consultants is to obtain permission fromcompanies' human resource or benefits managers to get access to thetop management and other high-earners of the company such as salespeople or professionals such as attorneys, doctors and accountants,to see if they can speak individually with those people, todetermine if they need additional coverage.

One point agents should highlight to employers is that rates fordisability plans have not risen appreciably, compared toskyrocketing rates for health insurance, says Matthew Tassey, pastchairman of The Life and Health Insurance Foundation for Education,an agent for the Principal Financial Group and a principal ofScribner Insurance and Burwell & Burwell, an employee benefitsbroker.

“When disability is tied to employment, you're dealing with abetter-than-average population of people because they areemployable,” Tassay says. “Disability insurance rates have notmoved up anyway near the rate of inflation.” To be sure, choosingthe appropriate remedies to fill the gap for high-earners can beconfusing for employers, says Karen Trumbull English, a partnerwith Spring Consulting Group.

However, when employers and their consultants or brokers havethe opportunity to work closely on setting strategy, andorganizational culture is needs-based, “incorporation ofsupplemental benefits often results,” she says. Gary F. Terry, anexecutive vice president and managing director of The WestportGroup in Boston, says disability insurance “is not bought, it'ssold, particularly supplemental disability insurance.”

“Most human resource professionals and executives ofcorporations understand that good employee benefits packages shouldhave a long-term disability program, but that's as far as it goes,”Terry says. “Employers say that employees are not asking for it, soit must not be an issue. But until employees realize they have theproblem, they are not going to ask for the solution.” This spells asignificant opportunity for brokers. “It's really not sales, it'seducating the public.”