Managing Costs Within Your Disability Program 

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Jun 11 2020

The COVID-19 pandemic continues to impact employers and employees in a variety of unique ways. As such, employers continue to seek new strategies and solutions to evaluate and structure their benefit programs to save on costs, without sacrificing coverage options and value, especially options to help employees protect themselves from financial risk. One cost containment strategy many are considering is combining Supplemental Individual Disability (IDI) with their Group Long Term Disability plan designs.

What is IDI?

IDI is a supplemental layer of disability coverage that sits on top of Group Long Term Disability (LTD) plans.  Its purpose is to provide coverage to employees whose incomes cannot be fully covered by the LTD plan design, thereby restoring their disability coverage to traditional levels (usually 60% of income).  

Why is it important to consider?

Certainly, most employers offer disability insurance, but too often, the limiting effect of the LTD maximum monthly benefit may not be fully appreciated.  Given financial stress and pressures exist with employees of all levels, this presents a hidden risk to some of an employer’s top talent.  Specifically, an employer’s most highly-compensated employees are negatively impacted by the monthly maximums, or caps, in an LTD plan.

 For example, an employer has an LTD plan design of 60% income replacement, up to a monthly maximum of $10,000.  This means that the maximum annual benefit payout is $120,000.  Therefore, any employee earning more than $200,000 would have less than 60% of their income replaced by the plan in the event of a disability.  What’s more, IDI can cover income from bonuses and commissions, where most Group LTD plans cover base salary only.  And, IDI policies are fully portable, in the event of employment separation, whereas LTD coverage terminates with employment.

Employers who do recognize this risk will sometimes implement LTD plan designs that carry a high monthly maximum benefit.  Oftentimes, the high monthly maximums are in place to ensure group disability benefits for a small slice of their employee population. This strategy poses two potential complications:

1.       Higher group rates:  Depending on certain risk factors, carriers reinsure monthly benefit amounts above $10,000 – 15,000, and the cost of doing so is factored into the rates.

2.       Rate volatility:  Exposes the LTD plan to potential shock claims, which can impact rates for the entire group in the long run.

Offering an integrated LTD and IDI strategy can help employers reduce their exposure to economic risk and increased benefit costs.  It is a powerful solution that helps protect the financial stability of top talent, while delivering long-term value and peace of mind in uncertain times.

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