Retaining key contributors: Why it pays not to ignore IDI
As the country emerges from the COVID-19 pandemic, key employees pivotal to organizational success are reassessing their careers, crystalizing what’s important to them and voting with their feet, if their employment situation isn’t the right fit. Employers are experiencing resignations from key people at unprecedented levels. To counter this, employers are revisiting their total rewards packages to ensure base salaries, commissions and bonus awards are effective in helping companies recruit, reward and retain the key drivers of the organization. With variable compensation representing 25–100% of base salary, it’s a material piece of the overall W-2 reported to employees. However, key employees need adequate protection for their standard of living, in the event of a devastating and long-term disability (LTD).
The conundrum leaving key employees with questions: the notion organizations intend to replace 60% of “income” for employees. Does this mean only salary is protected? What about other forms of cash compensation, such as commissions and bonuses (i.e. total W-2 reported income)? In response, employers are actively looking to address and improve their executive level income protection programs.
The Common Gaps in Coverage
Most employers offer disability insurance, but too often, the limiting effect of the LTD maximum monthly benefit isn’t fully understood, and 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 vulnerable because of the monthly maximums, or caps, in an LTD plan.
For example, an employer has a Group LTD plan design of 60% income replacement, up to a monthly salary maximum of $10,000 (average across employers). This means the maximum annual benefit payout is $120,000. Therefore, any employee earning more than $200,000 of salary would have less than 60% of their salary replaced by the plan, in the event of a disability. What’s more, bonuses and commissions in 75–80% of Group LTD plans aren’t covered at all. In this example, an employee with a $350,000 base salary has 34% of income replaced…not 60%. Add any variable compensation, and the income replacement ratios are significantly lower.
Employers who 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:
- 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.
- Rate volatility. Exposes the LTD plan to potential shock claims, which can impact rates for the entire group in the long run.
Combining Group LTD and IDI strategies
One risk diversifying strategy employers are moving toward is combining Supplemental Individual Disability (IDI) with their Group LTD plan designs. IDI is a supplemental layer of disability coverage that pairs with Group LTD coverage. Its purpose is to provide coverage to key employees whose incomes cannot be fully covered by the LTD plan design, thereby restoring their disability coverage to traditional levels (usually 60% of income that can include variable compensation). Offering an integrated IDI and LTD strategy helps employers reduce their exposure to economic risk and increased benefit costs, while also providing key employees fully portable IDI policies. It’s a powerful solution that helps protect the financial stability of top talent, while delivering long-term value and peace of mind in uncertain times.