In this article, we’re going to cover the best way to get a high-limit guaranteed issue disability insurance plan set up for a group. That group could be a small business, executives at a large corporation, partners at a firm, or a group of specialty doctors at a clinic.
The handy thing about these plans is that they can either be a proper group policy or a guaranteed issue individual policy, but with discounts for the group. So if you’re going through the hard work of figuring out what your company needs, we’ll help you through it.
The other part to consider is we will be discussing high-limit plans here. This is not your basic group plan. We will be covering high-limit options for well-compensated occupations such as doctors, lawyers, and executives.
Typical income protection plans don’t offer enough coverage for well-compensated teams. Retaining top employees with guaranteed issue, high-limit disability insurance can give companies an edge on hiring.
These plans offer fantastic customization options. If you are shopping around for something that fits your business, give us a call at 858-703-6178.
Table of contents
Guaranteed Issue vs. True Group
First, let’s cover a quick distinction between the two categories of insurance. Guaranteed issue policies cover one individual. They’re portable, so if that person leaves the company, then their disability insurance goes with them. Guaranteed issue means that the insurance company waives the tedious underwriting because they are purchasing it in bulk.
Guaranteed issue policies typically will be paid for by the individual. However, there are several fancy accounting tricks where companies will pay someone a bonus that conveniently matches the cost of their insurance. This neatly avoids making the benefit taxable.
Group policy benefits are taxable because the company pays for them, and therefore the individual still owes taxes.
One example would be XYZ Hospital (name changed). The hospital had guaranteed in their contracts to cover their executives and medical chairs to cover them against disability. However, these incomes were way beyond what long-term group and individual policies could cover. This opened up the hospital to an uncomfortable situation.
They solved this with one of these guaranteed issue policies that we’re describing here. It was only for the executives and medical chairs, covering them with plans that matched the benefits promised in their employment contracts. In this case, that was disability insurance for 75% of total income up to an additional $50,000 each month.
Why Well-Compensated Employees Hate Their DI Plans
First, issue and participation limits prevent adequate coverage. Each insurance company will only risk so much money on any one person. The maximum amount of insurance they will issue to an individual is the issue limit.
Insurance companies also get nervous when one person has too much coverage overall. The industry thinks that if 100% of income gets replaced, there is no reason to recover and get back to work.
The goal is to cover 60% of one’s income with disability insurance.
The follow-up problem for well-compensated professionals is that most disability insurance only covers paid income, like a W-2. It will not consider stock options, K-1 income, bonuses, commissions, or the like.
That alone presents a huge issue that can leave someone with a tiny fraction of their real income insured.
Then there are the standard problems with group policies, namely taxes and career changes. Because the employer typically pays for group disability insurance, the IRS considers it paid with pre-tax dollars. Therefore, should someone go on claim, the IRS will be right there asking for their share of the benefits.
The person is injured or fighting a disease! They don’t have time to deal with the IRS too.
Or, the employee moves on to greener pastures and loses their coverage altogether. Now the person is older, perhaps has developed health problems, and disability insurance suddenly becomes a major expense.
It is not unreasonable for a specialized surgeon in the United States to make $400,000 a year. We will round down for easier even numbers and say that’s $30,000 a month. If a group policy covers up to a high issue limit of $10,000 that’s ⅓ of their salary – before taxes.
(If this were an executive who also had bonuses for K-1, this would be an even smaller percentage.)
Many attorneys end up with careers as partners in a firm or building up their own. Legal teams can make up a respectable share of a corporation’s spread as well.
But let’s say a firm wants to attract the best talent possible with a phenomenal benefits package for the partners. They might already have a group policy covering their attorneys. But the partners have higher compensation that the group’s long-term plan inadequately covers – particularly after taxes.
So layering a long-term disability plan on top for the partners makes sense to cover the most valuable (and most difficult to replace) people on the team.
Bonuses. The group plan won’t cover bonuses, commissions, or stock options. Many companies also do some tricky accounting for their executive team where most of the income which that person generates comes from bonuses or K-1.
That fancy accounting leaves the executive team dangerously under-insured.
How to Tier Coverage
Building layers of coverage is easy.
Even with group coverage, getting that extra insurance for well-compensated team members involves looking at the salaries involved, then figuring out what adequate coverage would look like.
Next, determine how the plan will work. Will it be mandatory or voluntary? Will the person pay, or will the company “bonus” the exact amount of premiums plus tax to each person?
Even at the group participation limits, plus the individual participation limits, some companies will create their own rules to ensure that your team has enough income to cover their family in the event of an illness or injury.
Most of the time, this looks like a 3-tiered pyramid.
- Base – Group long-term disability coverage
- Middle – Individual disability coverage
- Top – Supplemental high-limit coverage
Other Types for Business Security
High-limit coverage can extend beyond individual disability insurance. Covering a business can offer exceptional protection to income for small business owners by ensuring the company can survive an owner’s health setback.
This product offers additional coverage for a business. Should someone critical to the firm suffer a disability, the carrier pays the company to keep it operational.
It’s a short-term product meant to create breathing room for the key employee to recover or hire someone equally competent.
Most partners have buy/sell or buy out agreements in the event that a partner passes unexpectedly. It funds the disability part of the agreement the owners have in place.
Business Overhead Expense
For small business owners, suffering a disability can signal the decline of a small business. While underwriting limits vary widely by company, some policies offer supplemental coverage to cover business costs until the owner recovers or can sell the business.
The brief benefit period of business overhead expense plans generally cannot cover business loan terms. Many banks will require a loan indemnification policy as insurance against unexpected setbacks in repayment.
This product allows the business owner to keep their personal policy (not assign it as collateral to the bank) and has more flexible benefit options to meet the loan repayment requirements.
Severance packages for well-compensated employees can get tricky when they promise a continuation of insurance coverage, particularly disability insurance where the insured needs to be employed.
Group plans drop non-employees. Individual plans cannot be purchased on someone who isn’t currently employed.
Severance disability coverage allows a company to uphold the severance agreement.
Contract guarantee insurance plans cover any extra bases left out by the previously listed types of business disability insurance.
The great thing about non-traditional insurance companies is they can develop customized policies to meet unique contract requirements. Whether there are contracts in business dealings or pre-nuptial agreements, this type of flexible policy can ensure that contractual obligations are met.
High-Limit Disability, In Conclusion
Well-compensated employees bring unique benefits to a business. It can be tricky to ensure that benefits are equally valuable to the employee. High-limit policies can ensure that an exceptionally valued employee has adequate coverage for their family.
Other types of business policies present customizable options to perfectly fit a business, protecting an entity decades in the making.
How Abrams Insurance Solutions Can Help
Companies depend on their key employees to maintain a competitive advantage. Offering amazing benefits can help retain the best ones.
Give us a call today at 858-703-6178 to look at customized high-limit, guaranteed issue options for your most valuable team members.