Disability Insurance (LTD) And The Highly Compensated

The highly compensated employee that only has group disability coverage is likely at a disadvantage over others. The high earner likely has a much smaller percentage of their income covered than lower earners on the same group long term disability policy (LTD.)

Typically, highly compensated employees such as attorneys, physicians, business owners, and successful salespeople will have group disability insurance through an employer.

There are inherent limitations with group long term disability policies, limitations which will likely cause tremendous issues for the highly compensated. To avoid such issues it is recommended that the highly compensated layer an individual disability policy on top of the group disability coverage.

A typical group disability policy may offer to pay 60% of the salary, capped at $10,000 per month. This may be an issue for the highly compensated employee making $25,000 a month. To make matters worse, the group disability premium is likely paid by the employer with pre-tax dollars, meaning the $10,000 may be taxable. The $10,000 monthly benefit is now much closer to $6000 after state and federal taxes are paid.

Most group disability policies will reduce the monthly benefit if the employee is receiving Social Security or Workers Compensation.

Most group disability policies define “disability” more restrictively than that of an individual disability policy.

Group disability policies can be cancelled by the employer or insurer for a number of reasons, such as a slow down in business or too many claims.

Individual disability policies are portable, the highly compensated covered from one job to the next.

Many individual disability policies allow the policyholder that loses group disability coverage to increase their individual disability benefits without additional medical underwriting.

There are non-cancelable and guaranteed renewable individual disability policies up to a certain age, locking in the premium rate to that age as well.