Supplemental Disability Meeting the Needs of Key Employees

Lance B Kolbet, RHU, LUTCFUniversity Financial Group

Review Topics:

• Perspective & Relevance of Income• Interesting Disability Facts• Financial Resources• Employer Response• Creating Solutions• Next Steps

Perspective

$50,000 $75,000 $100,000 $125,000 $150,000 $200,000

35 1,600,000 2,400,000 3,200,000 4,000,000 4,800,000 6,400,000

40 1,350,000 2,025,000 2,700,000 3,375,000 4,050,000 5,400,000

45 1,100,000 1,650,000 2,200,000 2,750,000 3,300,000 4,400,000

50 850,000 1,275,000 1,700,000 2,125,000 2,550,000 3,400,000

55 600,000 900,000 1,200,000 1,500,000 1,800,000 2,400,000

60 350,000 525,000 700,000 875,000 1,050,000 1,400,000

Your greatest asset?

The chart below projects total earned income from age X to age 67

AnnualIncome

Age

What have you done to protect it?

Your ABILITY to work is a very valuable asset!

Perspective

Fact 1. For most Americans, financial obligations demand 100% of paycheck

Fact 2. Americans don’t save enough

Two disturbing and relevant facts:

Perspective

Everything rests on income

DIS-ABILITY causes income loss

Dis-Ability Facts

• As mortality decreases due to advances of medicine and technology, the incidence of disability increase

• Conditions that used to be fatal often cause extended disabilities:

• Hypertension• Heart Disease• Cardiovascular• Diabetes

• Disability is 2-3 times more likely than Death at most ages

• Disability causes nearly 50% of all mortgage foreclosures 2% are caused by death.

Financial Resources

• Savings / Retirement Accounts

• Liquidate Assets

• Family/Friends

• Government Benefits

• Employer’s Group Long Term Disability plan

Provide LTD for all employees

• Efficient and cost effective• Transfer of risk to 3rd party• Isolate company from claims management• Increase employee confidence• All treated equally

Employer Response

Employer Response

+ LTD is for the masses and…

+ LTD rate is charged against all employees covered payroll and …

+ LTD benefits can be increased with ease and…

+ LTD is employer and insurance company controlled and…

- Contains cost containment features and benefit limits that can negatively impact key personnel

- Benefit enhancements will result in composite rate increases; reductions result in decreases

- Increases in LTD benefit maximums carry new pre-ex limits and/or Evidence of Insurability requirements

- Not portable or owned by insured employee

Employer Response

LTD Plan : 60% to $10,000 monthly benefit

Four employees:◗ Non-Executive - $50,000 salary◗ Exec #1 - $100,000 salary and $50,000 bonus ◗ Exec #2 - $200,000 salary and $100,000 bonus◗ Exec #3 - $300,000 salary and $200,000 bonus

0

20

40

60

Percent of Income Replacement (Pre-tax)

60%

Non-Executive Executive #1 Executive #3Executive #2

40%

40%

24%

Employer expense for LTD is managed best managed by:2. Limiting monthly benefit to a maximum of $5,000 - $10,000 and

3. Covering salary only

Impact to key employees?

Highest income earners receive the lowest percentage of benefit

Employer Response

LTD rates increase dramatically with the level of income replacement

Cost of LTD Relative to Income Replacement

5000 7500 10000 12500 15000 20000

Maximum Monthly Benefit

Rat

e

Increasing the LTD maximum benefit will result in higher composite rate

Creating Solutions

While all employees are important, all employees are not equal.

So then, how do employers take care of key employee needs?

Group LTD is an ideal foundation and can be supplemented with an Individual policy.

Supplemental policies are effective because they contain cost and benefit features not found in LTD.

Employer can offer different supplemental disability policy designs to different classes of employee.

Employer selects/designs his own classes, so if desired, supplemental policies are provided for select participants only.

Creating Solutions

Supplemental policy designs vary to serve different objectives. The most common are:

Fill in the gap created by a low benefit LTD plan (ex: a 60% to $5000 LTD protects incomes to $100k, those over 100k have <60%)

ORDesign plan to include protection for incentive comp(ex: 60% LTD covers Salary only, Supp provides 60% for Salary AND Incentive)

ORCover Salary and Incentive at highest % available(ex: Supp may provide between 75% - 100% income replacement)

The cost of a supplemental plan can be either employer or employee paid.

Taxation of benefits and impact on actual replacement ratios may be worth considering

Plan design highlightsCreating Solutions

Creating Solutions

Cost Characteristics of a Supplemental plan design• Maximizes the strengths of ID and LTD to deliver the best plan at

a more efficient cost

• Splitting the benefit between two contracts allows greater income replacement and eliminates/reduces discrimination against key employees

High

Benefit Quality/Cost Continuum

High

LTD

Benefit Quality andIncome Replacement

CostLow

ID

SupplementalPlan

Creating Solutions

Supplemental policies deliver unique features and benefits

• Rates are discounted, fixed, and guaranteed to age 65

• Coverage is portable at existing discounted rates

• Inclusion of bonus and incentive compensation in covered earnings

• No benefit offsets for Social Security, Worker’s Compensation, other income

• Contains benefits for Catastrophic disability and Non-Disabling injuries

• Annual benefit increases up to the maximum guaranteed standard issue (GSI) offer

Supplemental plans deliver a best of bothworlds approach for your most valued employees!

Creating Solutions

Next steps.

To design a supplemental plan we need: 1. Detailed census of employees being considered for supplemental plan2. Copy of current LTD certificate and confirmation of current rate3. Set date to review plan options

When plan is approved we move on to installation:• Authorized signature on employer documents• Pre-payment of 1st months premium• Each participant completes a short form application. (There is no need for medical exam or personal tax records) • Policies are issued to participants.

Questions?