The Long-Term Care Financial Sieve

Did you know?

• Long-Term Care isn’t just about the elderly. About 40% of care recipients are under the age of 65 who have suffered from an accident or illness.

  • Some examples: cancer, stroke, heart-attack, jet-skiing accident, mountain biking accident, or car accident.

• The current cost of long-term care services can easily exceed $10,000/month in the Northeast.

• Care on average is needed for 3 - 4 years, resulting on a financial exposure of $360,000 to $480,000 on average.

• Long-Term Care services are generally not paid for by Disability, Medicare, or Health Insurance

• Almost 70% of Americans turning age 65 can expect to use long-term care services during their lives, but only 1/3 of Americans have set aside money to protect themselves should the need arise.

• Long-Term Care can quickly deplete one’s savings or retirement account, and often bankrupts a household.

Fortunately, more Employers are offering benefit programs that can protect Employees against financial sieve in the event long-term care services are required. These programs often leverage Life/LTC hybrid products, are affordable, and offered on a Guarantee Issue Basis.

Chances are some of your clients’ key employees are being courted by competitors right now. It’s a tight labor market, and simply boosting salaries isn’t the answer. Executive Bonus Plans helps your clients retain essential individuals at a relatively low cost and with significant tax benefits.

The Advantage for Employers:

• Help attract and retain top talent at a relatively low cost.

• Bonuses given to employees to pay the whole life premium are tax deductible (the policy premium is taxable for the employee).

• Clients may pay a “double bonus” – providing enough money to employees to pay both the premiums and taxes.

• The employer may choose which executives will be given bonuses — and the amount of each bonus.

• There is an income-tax free death benefit for the employee’s beneficiaries.

• The employee retains ownership of policy cash values that grow tax deferred and can be used to supplement income in retirement.

• Unlike a 401(k), there are no Internal Revenue Code contribution limits, and there’s no penalty for early surrenders or loans — provided the policy isn’t classified as a Modified Endowment Contract

• “Golden Handcuffs”: outline the desired vesting period in a written employment contract.

 The Benefits for the Most Important Employees:

• Cash value on the whole life policy can be accessed at any time.

• Upon retirement, the employee may use the cash value to supplement retirement.

The Basics of an Executive Bonus Plan:

A basic Executive Bonus plan is very simple. The executive purchases a life insurance policy on his/her life, and the employer pays the premium (with the “bonus”). The employer gets to deduct the bonus, and the employee pays the taxes on the bonus. The employee enjoys the full policy cash value and death benefit. In some cases, the employer even pays the taxes for the employee (through what is called a “double bonus”).  

Navis Benefits Group, LLC, can help you design specialty benefit programs for your clients.

Trending Benefit: Life Insurance with Long-Term Care Coverage

The Trend:

Larger employers, with employees in multiple states are quickly adding Life Insurance with Long-Term Care coverage to their employee benefit programs.

Why?

The benefit is a cornerstone to financial wellness, by providing “2 in 1 Protection” with:

•        Permanent Life insurance which provides permanent coverage which can be taken into retirement, at the same cost as when working, unlike Term Life Insurance

•        Valuable Long-Term Care coverage that can help protect assets, by providing a source of funding the cost of care, rather than depleting savings, retirement account, or assets to pay for the cost of care.

Over 26 states are considering, or have enacted, a Long-Term Care payroll tax.  Washington State was the first to enact.  Washington State provides a payroll tax exemption to those that own Long-Term Care coverage, including Life with Long-Term Care products.

It is widely believed that most states will allow similar exemptions, provided that the Long-Term Care coverage is in place prior to the state enacting the payroll tax legislation.

Did you know?

The cost for Long-Term Care services is expected to more than double by 2051.  The current cost of care can easily exceed $10,000/month in the Northeast.

•        Care on average is needed for 3 – 4 years, resulting on a financial exposure of $360,000 to $480,000 on average.

•        Long-Term Care services are generally not paid for by Disability, Medicare, or Health Insurance

•        Almost 70% of Americans turning age 65 can expect to use long-term care services during their lives, but only 1/3 of Americans have set aside money to protect themselves should the need arise.

 Considering adding Life Insurance with Long-Term Care coverage to your Employee Benefit Offering?

Product design, underwriting offer, and plan pricing are important factors to consider. Employee education and appropriate enrollment tools are crucial to the success of the program. Most States require the Broker or Consultant meet specific Long-Term Care licensing requirements.

Navis Benefits Group, LLC offers over 26 years of Long-Term Care, and Voluntary Benefits expertise.

Protecting income is a primary pillar of an Employer's Financial Wellness Program. While most employers offer Group LTD, more often than not, it's still not enough. Guess what more than 50% of Fortune 500 companies offer?

When over 50% of Fortune 500 companies offer a type of benefit program, it's a benefit with credibility and employee appeal.

Supplemental Disability Insurance - also known as Income Protection or Supplemental LTD - is a benefit offered by over 50% of Fortune 500 Companies. Yet, the majority of supplemental plans are purchased by small business, covering between 5 and 10 employees.

Employer provided Group Long Term Disability (LTD) plans are a commonly offered benefit program, but LTD more often than not, is not enough. Supplemental LTD plans are layered on top of LTD, can help Employers better protect their employee's income, and greatly strengthens the Employer's Financial Wellness program.

May is Disability Insurance Awareness Month (DIAM). Protect the paycheck!

The Parallels

What are the parallels between losing your job, a pay cut, and becoming disabled?

In today’s economic environment the American worker is financially struggling - more than ever - contributing to stress, anxiety, depression, and lost productivity.

The American worker fears losing his or her job. “Unemployment” won’t pay the bills, especially for the higher income worker.

Similarly, the “able” American worker would be in peril if he or she received a significant cut in pay – say 15%-20%.

That same American worker becomes disabled due to an unexpected health condition or accident and faces a cut in pay that could be as little as 40%, and commonly as deep as 70%-80%.

It does not matter how your paycheck was devastated. It’s all the same. But, unlike the lost job or cut in pay, your Employer can do something about the huge reduction in pay in the event of a disability.

Employers can provide up to 75% Income Protection of Total Compensation, in the event of a long-term disability (LTD).

Most Group LTD plans intend to replace 60% of base salary only. Sixty percent is a superficial percentage adopted by actuaries, insurance companies, employers, and employee benefit consultants years ago.

The original idea behind 60% replacement was to minimize the LTD plan risk by removing any “financial incentive” to file a disability claim. It also minimizes the likelihood of malingering (staying on claim once recovered). The logic does make sense.

But a Group LTD plan that replaces 60% of a disabled employee’s income, results in a 40% pay cut.

Add to the 40% pay cut other common deficiencies found with Group LTD plans, and a disabled employee expecting to see 60% of income replaced by the LTD, might only see 20% to 30% replacement.

Here’s why:

• Group LTD plans have benefit maximums, capping the monthly amount payable. Highly compensated employees, including Executives, Physicians, Attorneys, or Investment Bankers, might only receive 10-30% replacement due to the plan maximum.

• Employers typically pay the premium for the Group LTD. While this is great, this results in the benefit being taxable as income, at time of claim. An employee expecting to receive 60%, after taxes, would receive 43% assuming a 28% tax bracket.

• Bonus compensation is not covered by Group LTD plans 78% of the time. Bonus compensation is becoming a growing part of the American workers compensation package. Protecting bonus compensation in the event of a disability should be a priority for every Employee Benefit Consultant and Human Resource Benefit Professional.

Employer-sponsored Supplemental Disability Insurance (IDI) plans can solve these problems. Supplemental plans can provide 75% income replacement, protect bonus compensation, and increase the monthly benefit maximum.

In the employee benefits world, the large employers tend to be the “pioneers” and early adopters. Insurance companies first introduce new benefits, technology platforms, or initiatives to employers with over 2,000 employees. Over 50% of Fortune 500 Companies, and sixty-eight of the largest law firms (AM Top 100) offer Supplemental Disability Insurance plans, layered on top of the Group LTD.

As such with the strong and growing presence of Supplemental Plans in the larger employer space, this benefit offering is becoming a new and popular benefit in mid to small employer space as well.

What would you do…

…if you became disabled?

Most Americans do not have enough savings, to pay their bills and household expenses for over 90 days. This includes highly compensated employees. While 48% of Americans report having less than 3 months’ worth of savings, 60% of those earning over $100,000 admit to living paycheck to paycheck according to a leading disability insurance company’s study. It’s likely that both these numbers are “under-reported”, since Americans are proud and reluctant to disclose financial hardship for a survey.

Why is this important? Because 1 in 4 Americans will become disabled for more than 90 days, during their working years. And, if disabled, the average duration of a disability claim is 2.5 years for a rank and file employee, and 4.5 years for an Executive.

But…. your employer provides you with Group Long Term Disability (LTD) protection! Great, you’re all set!

Not so fast!!

While Group LTD provides a great foundation of protection, Group LTD plans typically do not adequately protect employees earning over $100,000. Why? Because Group LTD plan maximums “cap” monthly benefit amounts. Highly compensated employees can cap at the monthly benefit maximum, before achieving the 60% target replacement. This could result in highly compensated employees receiving 20% to 30% protection.

In addition, Group LTD plans generally protect base salary only. Many employees receive bonus, commissions, or deferred compensation. This is not covered by the Group LTD plan 78% of the time.

Last, Uncle Sam gets his payment. If your employer pays for your Group LTD coverage - which is great, and the most common approach - your benefit at time of claim is taxed, just like your income is taxed when you are working.

So, if you are not fully protected by your Group LTD plan, and like most Americans you have less than 3 months of savings, and are living paycheck to paycheck, what would you do if you became disabled? Cashing in your retirement, leverage your mortgage, use credit cards? None of those options have a happy ending.

Employer-sponsored Supplemental Disability Insurance coverage is a great solution. The coverage is very affordable, guaranteed issue, and portable at the same price. These plans can provide up to 75% income protection, including salary, commission, bonus, and deferred compensation.

Over 50% of Fortune 500 companies offer Supplemental Disability Insurance programs. Over recent years, this have become a more mainstream benefit program in the smaller employer marketplace and is an excellent attract/retain benefit for highly compensated employees.

May is Disability Insurance Awareness Month (DIAM)!

Game Changer!

Almost every Human Resource Benefit Professional would rejoice if their organization purchased a new state-of-the-art Benefit Admin system, which would reduce time consuming benefit admin tasks, better engage their workforce, and provide real-time API connections with benefit providers. Right?!

Not so fast!

Employers rely on HRIS and Benefits Administration platforms to assist with complicated and time-consuming processes, including:

• Onboarding new hires

• Open enrollment and plan selection

• Benefits communication and education

• Absence management tracking and reporting

• Day-to-day administrative tasks

It’s true, employers in the mid-to-large size segment are updating to new, modernized HRIS/Ben Admin platforms such as Workday, UKG, and ADP's Workforce Now, at a rapid pace. For a good reason.

So, what’s the problem?

You’ve installed your new Ben Admin platform and are excited for your employees to experience their first Open Enrollment on say, Workday, or UKG. Even with a new, top-of-the-line platform with the latest features, there may still be gaps your HRIS/Ben Admin system is not able to address.

Let’s look at some potential gaps:

• 30% of your workforce doesn’t have access to a computer at work. How will they enroll?

• You assumed that your employees could figure out how to enroll on the new system. But now your phone is ringing off the hook with employees asking you how to use the new system to enroll. And yep, the Benefit Admin provider offers IT support, but not actual enrollment support.

• The new Ben Admin platform provides an improved benefit enrollment experience compared to the old. But truthfully, self-serve Ben Admin solutions provide a minimal level of effective employee benefit education.

• Your company is in a growth mode, and you are onboarding 50+ employees/month. New hire orientation is a challenge, and time consuming; but leaving a new hire to figure out how to use the new Ben Admin system doesn’t make for a great onboarding experience.

There’s help!

Employees are much more likely to report satisfaction with their employer and participate in benefits offerings if they understand what is being offered to them. Especially, if they understand how to use the Ben Admin system.

While the Ben Admin decision support resources provide some level of employee education, technology can be complemented with human assistance.

Human assistance via a benefit counselor, during the Open Enrollment or New Hire Orientation, can be a great way to introduce a new benefit admin/enrollment platform to your employees. Licensed employee benefit counselors can assist employees via face to face or virtual meetings, or through an on-demand call center. Benefit counselors can help employees learn to navigate and use a new enrollment platform. Counselors educate employees on the benefits program and provide decision-making support and can enroll employees directly on the new Ben Admin platform. For those employees that do not have access to a computer, the counselor can capture enrollment elections telephonically on the new Ben Admin platform.

There are many professional firms that offer benefit counselor services. Some firms charge a PEPM; others will leverage commissions generated from a voluntary benefit to fund the expense of counselors. Choosing a highly qualified firm that best identifies with your corporate goals, culture, and provides Grade A service can be a complex process. Partnering with a Voluntary Benefit Specialist can assist in the vetting process.

The final word:

A modernized Ben Admin platform coupled with human assistance via licensed benefit counselors, can be a game changer. As a result, your employees will feel confident in their benefit decisions, have an improved understanding on how to navigate the new benefits enrollment platform, become better consumers of insurance, and acquire a heightened sense of value and loyalty to their employer.

If you want to learn more about this topic and benefit counselor options, please reach out to us here at Navis Benefits Group.

Navis Benefits Group, LLC is a specialty benefit firm, partnering with employee benefit consultants and employers, to design, market, install, and administer new, creative, and exciting benefit programs. We help employee benefit Firms focus on what they do best – health insurance – by serving as their outsourced, turn-key specialty benefits partner.

Something New!

It’s old news that Employers are competing for top talent. It’s also old news that a strong benefits program is a good tool to better position an employer in securing or retaining that talented employee. Old news, but both very true.

Let’s be honest, everyone is talking about the same “new” wellness program, initiative, or benefit that virtually everyone else is adding. Boring!

To stand out from the pack, it’s time to talk about something new! Here are five affordable new ideas for you:

1. Protection for student loan debt, in the event of a disability. Does your disability insurance plan provide an additional benefit specifically aimed at helping employees pay student debt when retired? Disability insurance plans, such as Group LTD, do not provide full income replacement when disabled, making it difficult to pay off student loan debt in the event of a disability. This feature resonates would resonate with most employees and be a crucial feature for occupations that carry heavy student loan debt, such as physicians.

2. Employer-paid Critical Illness Protection for your Executives and valued employees, with amounts up to $100,000 per occurrence. Critical Illnesses such as heart attack, stroke, or even cancer, are some of the leading causes of disability, and can lead to substantial out-of-pocket medical expenses. The traditional critical illness plans offered on a “voluntary” basis typically only provide $10,000 - $30,000 of coverage, depending on the size of the employer. These voluntary plans with small coverage amounts don’t appeal to the highly compensated. However, a plan with $100,000 of benefit, would appeal.

3. Removal of the 24-month Mental, Nervous, Drug and Alcohol (MNDA) limitation from Group LTD and Supplemental IDI plans. Most Group LTD and Supplemental IDI plans limit benefits payments to a maximum of 24-months duration for disabilities caused by mental health conditions (depression, anxiety, bi-polar, schizophrenia as examples), or drug and alcohol related conditions. However, a disability caused by “any other condition” would be eligible to receive benefits payments to age 65 or age 67. Mental health conditions are becoming increasingly prevalent in the US with 1 in 5 adults in the US experiences mental illness in any given year, according to the National Institute of Mental Health. Mental health conditions can significantly affect an individual’s ability to work.

Healthcare professionals and Attorneys are two segments of the workforce particularly at risk for mental health-related disability, including Drug and Alcohol abuse. A study by the American Medical Association (AMA) found that nearly 1 in 3 physicians experience symptoms of burnout and clinical depression. Drug and Alcohol abuse is the top cause of disability claims in the Healthcare and Law Firm segments, accounting for over 17% of claims in these respected industries, according to Unum’s benchmarking data.

With the rising prevalence of mental health conditions, it is more important than ever for Employers to provide Group LTD and Supplemental IDI cover that covers mental, nervous, drug and alcohol (MNDA) related conditions like “any other disability” with full benefit duration protection.

4. Long-Term Care Insurance coverage is the newest “old” hot button. During the mid-1990s thru 2010, the long-term care insurance industry was booming, with the introduction of the Kennedy-Kassebaum federal LTC legislation of 1996. Employers were offering this benefit back then, as the cutting-edge benefit. Insurance carriers, however, underpriced the policies, which led to virtually every major carrier leaving the market due to financial losses. Policies that were sold remained in place, and still honored as required.

The need for long-term care coverage didn’t decrease; but rather has significantly increased since then. Long-term care is the type of care required when an individual is unable to perform 2 of 6 Activities of Daily Living, also known as ADLs (bathing, dressing, transferring, eating, toileting, continence); or suffers from severe cognitive impairment (Alzheimer’s; dementia). Over 50% of Americans will need long-term care services in their lifetime; and 40% of those that need care will do so before age 65. America is aging, and the need for long-term care services will only increase.

Why is long-term care insurance important? The cost of care can easily create financial hardship, if not financially devastate a household.

The cost of care isn’t covered by medical insurance. Medicaid will pay for care but requires that the recipient be essentially impoverished. Medicare will only pay for a short duration and under limited circumstances (3 consecutive days of hospitalization required, followed by long-term care provided in a facility. That leaves the cost of care up to the individual needing care, and leaves savings accounts, investments, retirement savings, and assets such as the home, exposed. Considering the average monthly cost of care in a facility in the Northeast, reaching $12,000/month, and the average claim exceeding 2.5 years, an individual can easily spend $360,000 out-of-pocket on long-term care services in the absence of having a long-term care policy.

To address the long-term care “crisis” and the financial burden being placed on Medicaid as a result, states are introducing “long-term care payroll tax” legislation. Washington State was the first state to enact legislation, effective July 1, 2023, and 19 other states are in the process of exploring, designing, or introducing legislation. The legislation taxes residents who do not own private long-term care coverage. In Washington’s case, the payroll tax is .58/$100. For a person earning $100,000, he/she would pay $580 annual payroll tax. In return, Washington will provide $36,000 of lifetime benefits; insufficient enough to cover the exposure, would be an understatement.

Washington State’s legislation provides an exemption from the payroll tax to residents that own long-term care coverage prior to the legislation’s effective date. Today’s long-term care hybrid policies as described below, provide stronger benefits and often at a lower cost compared to the payroll tax.

The good news is that new, more affordable long-term care hybrid insurance protection is available today. Hybrid plans leverage a life insurance policy chassis, with a long-term care benefit feature. These plans provide long-term care benefits; and in the event the long-term care benefit is not needed, will still pay the death benefit. Coverage is offered on a voluntary basis, with guaranteed issue, and is payroll deducted.

With Employers in impacted states being responsible for administering the payroll tax, a long-term care insurance program will be well received by employees as an alternative to the payroll tax, if 1990 – 2010 was any indication of how popular this benefit was.

5. 75% Income Protection of Total Compensation, in the event of a long-term disability (LTD). Most Group LTD plans intent to replace 60% of base salary only. Sixty percent is a superficial percentage adopted by actuaries, insurance companies, employers, and employee benefit consultants years ago.

The original idea behind 60% replacement was to minimize the LTD plan risk by removing any “financial incentive” to file a disability claim. It also minimizes the likelihood of malingering (staying on claim once recovered). The logic does makes sense.

But considering that most Americans live paycheck to paycheck when working, a 40% pay cut when disabled is frightening. And it gets worse….

Add to the 40% pay cut, several other common deficiencies in Group LTD plans, and a disabled employee expecting to see 60% of income replaced by the LTD, might only see 20% to 30% replacement. Here’s why:

• Employers typically pay the premium for the Group LTD. While this is great, this results in the benefit being taxed as income, at time of claim. Essentially, an employee expecting to receive 60%, after taxes, would receive 43% assuming a 28% tax bracket.

• Group LTD plans have benefit maximums, capping the monthly amount payable. Highly compensated employees, including Executives, Physicians, Attorneys, or Investment Bankers, might only receive 10-30% replacement due to the plan maximum. This is before taxes being taken out.

• Bonus compensation is not covered by Group LTD plans, 78% of the time. Bonus compensation is becoming a growing part of the American workers compensation package. Protecting bonus compensation in the event of a disability, should be a priority for every Employee Benefit Consultant and Human Resource Benefit Professional.

Are you still not convinced that the Group LTD 60% target replacement threshold provides insufficient protection? The benchmarking data, or peer analysis, is convincing. Over 50% of Fortune 500 Companies, and 68 of the largest law firms (AM Top 100) offer Supplemental Disability Insurance plans, layered on top of the LTD. These plans can provide 75% income protection, protect bonus compensation, increase the monthly benefit maximum, and can be employer-paid, or employee paid.

In the benefits world, the large employers tend to be the “pioneers” and early adopters. Insurance companies first introduce new benefits, technology platforms, or initiatives to employers with over 2,000 employees. With the strong and growing presence of Supplemental Plans in the larger employer space, this benefit offering is becoming a new and popular benefit in mid to small employer space as well.

Navis Benefits Group, LLC is a specialty benefit firm, partnering with employee benefit consultants and employers, to design, market, install, and administer new, creative, and exciting benefit programs. We help employee benefit firm focus on what they do best – health insurance – by serving as their outsourced, turn-key specialty benefits partner.

Financial Wellness can mean MANY things… The term “financial wellness” has been on the mind of Employers and Working Americans for quite some time. However, the term hasn’t been a top subject of conversation in the Employee Benefits space, until recent years.

Taking center stage in the financial wellness conversation, by no surprise, is the paycheck. Said simple: income. The ability to generate an income is the foundation of all things financial. This includes the ability to pay bills, provide for the household, generate savings, save for retirement, pay for medical expenses, save for school, and live a rewarding lifestyle.

Protecting the ability to generate an income, can take on many forms. Preserving your health with good medical coverage and healthy habits; replacing lost income in the event of death; and replacing lost income due to a disability, are three primary pillars to achieving financial wellness.

Most employers offer good medical insurance and employ wellness programs designed to help employees make healthier decisions and live healthier lifestyles. By doing so, employees are less likely to die prematurely, or become disabled. But - health insurance does not protect or replace lost income due to death or disability.

Employees generally accept the fact that there’s a 100% chance of death. As such, the idea of buying life insurance – or supplementing basic employer-paid life insurance – is an easy concept to grasp.

As it relates to protecting or replacing lost income during the working years, Americans have a 4 times greater chance of becoming disabled for over 90 days, than dying. During the working years, an American has a 25% chance of being disabled for over 90 days. And, when a disability last more than 90 days, the average duration of a disability is 2.5 years for the rank and file employee, and over 4.5 years for the highly compensated employee. The exposure to lost income when disabled is significant, and perhaps the greatest threat to achieving financial wellness.

Yes, Employers most employers offer Group Long Term Disability Insurance (LTD) to help employees replace lost income in the event a disability lasts longer than 90 days.

But - 100% of the time, the Group LTD plan is deficient in protecting all employees, at a high enough level of coverage. Guaranteed.

An income replacement audit will paint a very clear picture of the Group LTD plan’s deficiencies.

To start, most Group LTD plans provide an income replacement percentage of 60% or less. Most plans are employer-paid, resulting in a taxable benefit. This means that a 60% benefit, after taxes, results in about 43% of income replaced (using a 28% tax bracket). Using the same tax bracket, this employee would expect to take home 72% of gross pay, when health. That’s almost a 30% shortfall!

Next, Group LTD plans have monthly benefit maximums, limiting the amount of monthly disability benefit an employee receives. Typical Group LTD benefit maximums are limited to $5,000/month, and $10,000/month. With a $5,000/monthly Group LTD benefit maximum, employees earning over $100,000 would receive LESS than 60% replacement. This is before any taxation of benefits.

Let’s not forget about bonus or incentive compensation. Bonus and other forms of incentive compensation have become increasingly common and a larger portion of the total compensation figure. Yet, by design, almost 78% of Group LTD plans do not cover bonus compensation.

What can Employers do, to address this overlooked barrier to employees achieving Financial Wellness?

Employers can offer a Supplemental Income Protection (IDI), also known as Supplemental LTD benefit. These plans can be employer-paid, and offered at a cost less than 1% of payroll. Or can be offered on an employee-paid basis, via payroll deduction.

Equally as important, as a part of an employer-sponsored Supplemental Disability Insurance (IDI) program, employees will have access to an educational platform, providing a personalized income assessment, and tools to help employees assess their own financial situation. These are unique and separate tools from a Benefit Enrollment or Benefit Administration platform, which generally fail to provide any sort of education or tools as relates to income protection.

The income protection focused site is an interactive, responsive, and engaging tool that helps individuals better understand how Supplemental Disability Insurance (IDI) can work to provide more income replacement during a disability — and allows them to easily enroll in a few short steps.

Supplemental Disability Insurance should be a focus of every Employer’s Financial Wellness strategy, and include interactive decision support tools, to include a personalized income assessment.

Navis Benefits Group specializes in Supplemental Disability Insurance programs, and partners with Employee Benefit Firms and Employers to design, install, and administer these programs. Navis is here to help!

The 60% Replacement Dilemma:

Do you have highly compensated Employees or Executives? Most likely they are not receiving 60% replacement that the Group LTD plan provides, due to the plan benefit maximum or uncovered compensation.

You have some options:

1. Do nothing. Think about how this impacts your ability to attract and retain. More importantly, the impact to employee moral when a well-respected colleague becomes disabled and receives 20-30% income replacement.

2. Self-insure income not protected due to the Group LTD benefit maximum or uncovered forms of compensation, such as bonus income. Be sure to formal written salary continuation plan establishing under what criteria the company will pay, how much, and for how long. Understand the impact self-insuring/self-funding even a portion of a claim will have on the Company’s balance sheet. There are accounting rules that must be followed (FASB 112).

3. Increase the Group LTD maximum. This is not always an option, and often, not the best option. Insurance carriers typically underwrite for modest plan maximums, to minimize the plans risk and help keep premium down. The higher the benefit max, the riskier the plan; and the higher maximum can come with a big price tag. Most insurance companies will limit the maximum to $10,000/month, exceeding this amount by exception or reserve higher maximums for larger employers. Larger employers that might have a higher benefit maximum, should be cognizant of how their claims experience and higher reserves because of the higher maximums, impact future renewal pricing. Regardless of the Group LTD maximum, there’s still a good chance that some highly compensated employees still won’t be adequately protected by the LTD plan.

4. Insure the coverage gaps, with a Supplemental Income Protection plan. Coverage can be employer-paid or voluntary, and generally costs less than 1% of payroll. Insuring the gaps in coverage minimizes the Company’s financial and legal risk, improves employee morale in the event of a disability, and helps attract and retain top talent. For larger employers where claims experience and reserve exposure impacts future plan pricing, Supplemental Income Protection plans can help spread the risk. Supplemental Income Protection plans generally leverage a fixed premium, and the claims experience (and therefore reserves), do not impact the Group LTD plan experience.

Supplemental IDI plans can address the gaps in Group LTD coverage levels, and typically cost less than 1% of compensation. Navis Benefits Group specializes in Supplemental Income Protection programs, and can help design an employer-paid or voluntary solution.

Employer Alert: Avoiding Repercussions of FASB 112

Disability Insurance Gaps and Employer Balance Sheet Liability

CFOs and HR Benefit Managers might ask what a disability has to do with accounting and balance sheet liabilities.

Most Employers provide Group Long Term Disability (LTD) insurance as an Employee Benefit. Group LTD plans target 60% income replacement for the disabled employee. These plans most often do not adequately protect highly compensated employees or Executives due to plan design limits, such as benefit maximums, uncovered forms of compensation, and taxation of benefits.

The Employer has several options to help improve the income replacement levels of their highly compensated employees while disabled. The option the Employer chooses may create a significant balance sheet liability due to their legal obligations to the Financial Accounting Standards Board’s statement 112, also known as FASB 112.

FASB 112 requires Employers to hold any post-employment benefits, such as self-funded disability benefit payments or salary continuation, as a liability on the balance sheet. The liability on the balance sheet is not limited to the current benefit paid, but on the total estimated amount to be paid on the liability for the duration of the disability “claim”. Essentially, the Employer’s liability includes the amount of future benefits to be paid (or reserves) for the disability “claim”.

What are the Employer’s options, and when does FASB 112 come into play?

1. Do nothing. This means that the Employer will only provide protection under the Group LTD plan – even if it means their highly valued employee will face significant hardship while disabled. The Employer is not subject to FASB 112. An income replacement “gap analysis” commonly shows Group LTD plans replacing as little as 10 – 25% of a highly compensated employee’s income. This is a tough message to deliver to your valued employees, Executives, and even Officers. Seeing a colleague face unnecessary financial hardship during a difficult time, isn’t good for employee moral; never mind attracting and retaining top talent.

2. Self-fund income replacement amounts not protected by the Group LTD plan, via a written qualified sick or salary continuation plan. Self-funded amounts are subject to accounting under FASB 112. We’ll look at some examples of FASB 112s impact on the balance sheet further below. A written plan identifies the amount, and the duration for which benefit payments will be guaranteed for. By doing so, the written plan could potentially limit the number of years that payments need to be accounted for under FASB 112. However, if the Employer limits the amount and duration of self-funded benefit payments, the Employer still leaves highly compensated employees financially exposed during a disability.

The Employer’s liability on the balance sheet decreases each year, as the benefits are paid. The liability from the balance sheet is removed the sooner of once the Executive has returned to work full-time, or when the benefits cease.

3. Offer an additional fully insured disability insurance protection, such as a Supplemental Disability Insurance (IDI) or Supplemental LTD plan. The insurance company assumes the liability. Since the Employer is no longer self-funding benefit payments, the Employer avoids the obligations and impact of FASB 112. Highly compensated employees can be fully insured with a supplemental and/or excess risk disability insurance plan, often at a very modest cost. This is the best option for attracting and retaining top talent, while protecting the Employer’s balance sheet.

Assuming the Employer selected Option 2 - Let’s look at some numbers:

An Executive earns $500,000 of base salary annually, or $41,666/month. We will leave bonus compensation out of the conversation for mathematical simplicity. However, keep in mind that 78% of Group LTD plans do not cover bonus compensation – and most Executives earn bonus income!

Let’s imagine this Executive becomes disabled due to sickness and can’t work. Based on the type of sickness, the Executive is expected to miss work for 5 years (60 months).

The Employer’s Group LTD protects up to 60% of base salary, to a monthly benefit maximum of $10,000/month. This Executive is only receiving 24% income replacement of BASE salary ($10,000 /$41,666). Keep in mind that the under-insurance situation is much worse than 24%, since we are ignoring bonus, which isn’t normally covered by LTD). Since 60% of this Executives base salary in $25,000 month ($41,666 x .6), this Executive requires a supplement of $15,000 month to achieve 60% replacement.

Example A: The Employer choses to “self-fund” the additional $15,000 monthly benefit the Executive needs to achieve 60% replacement.

FASB 112 requires the Employer to hold as a liability on the balance sheet, the total estimated amount to be paid on the liability for the duration of the “claim”. To put numbers to this, the Employer would need to hold $15,000/month for 5 years (60 months), or $900,000, as the liability on the balance sheet.

Example B: The Employer choses to protect 100% of base salary ($41,666/month). Since the Group LTD provides $15,000/month, the Employer would self-fund $26,666/month to achieve 100% protection. FASB 112 requires the Employer to hold $1,599,960 (60 months of disability) as a total estimated liability on the balance sheet.

Remember, the Employer’s liability on the balance sheet decreases each year, as the benefits are paid. The liability from the balance sheet is removed the sooner of once the Executive has returned to work full-time, or when the benefits cease.

The Final Word:

The Employer has several options to help improve the income replacement levels of their highly compensated employees while disabled. The option the Employer chooses may create a significant balance sheet liability due to their legal obligations to FASB 112. A Supplemental Disability Insurance (IDI) Plan, also known as Supplemental LTD, can eliminate the Employer’s obligation to FASB 112 and liability to the balance sheet, reduces the Employer’s financial exposure, improves income protection levels, helps attract and retain top talent, and is very affordable.

For more information on FASB 112, please consult your accountant.

Navis Benefits Group, LLC is a “specialty benefits” Firm, and works with Employee Benefit Firms and their Employer clients to provide state-of-the-art Supplemental Disability Benefit Plans, Executive Benefit

The Great Investment - 1%

Would you spend less than 1% of your paycheck to protect it, if you had a 25% chance of losing 40% or more of your paycheck for 4.5 years?

The average duration of a long-term disability (LTD) claim for a highly compensated employee is 4.5 years; compared to 2.5 years for a rank-and-file employee. Working Americans have a 25% chance of suffering from a disability during their working years, lasting over 90 days (with an average duration ranging from 2.5 to 4.5 years).

Employer’s Group Long-Term Disability (LTD) plans typically replace 60% of base salary at best. Many highly compensated employees are not fully protected by the Group LTD plan, due to plan benefit maximums, uncovered compensation such as bonus income, and the benefit being taxable in most situations. This can easily leave highly compensated employees with 10-30% income protection.

Employer-sponsored Supplemental LTD plans – often called Supplemental IDI - can enhance coverage levels in the event of a disability, at a modest cost to the employer – typically costing less than 1% of compensation.

Imagine: You’re a hard-working Executive earning $400,000/year. At age 55, you become disabled.

You learn your Employer’s Group LTD plan will only pay you $120,000/year. Over the 10 years of your disability, you “lose” $2,800,000 in potential income. Result: your retirement goals and dreams go unrealized.

This can be avoided. How?

The Human Resource Benefit Professional should request an income protection gap analysis and an audit of the LTD plan, to identify the plan’s gaps and contractual flaws. Benchmarking data will demonstrate the plans competitiveness. And a Supplemental Income Protection plan can address the gaps and shortfalls. These plans can be offered on an employer-paid basis at a minimal cost; or offered to employees on a voluntary basis.

Navis Benefits Group can help!

Is this you, or your Employee Benefit Consultant? “Specialization” is important - and rare in the Employee Benefits space! It’s easy to say that “you do it all”. Yes, one-stop shopping is convenient. Convenience and scale don’t equate to better - or the best. Navis Benefits Group, LLC is truly a specialist. We excel at what we do - “specialty benefits”.

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A simple "gap analysis" of an Employer's Group LTD plan, can help identify coverage gaps, and minimize the financial burden a disabled employee might experience

I am both thrilled and humbled to share that today we celebrate Navis Benefits Group’s 1st Birthday! I am forever grateful to those Employee Benefit Firms and Employers that gave Navis Benefits Group an opportunity to partner during this first and vitally important year in business. The business results were stronger than anticipated, and Navis Benefits Group is proud to celebrate this milestone achievement with you. A very special thanks to my wife Christina, and my three growing boys, who have been my inspiration and motivation to make this dream a successful reality. The sacrifices you’ve made this past year run deep, and your support and love has been unwavering. I look forward to the excitement and continued growth this next year, and on-boarding new Employee Benefit Firm and Employer partners.

Happy 1st Birthday, Navis Benefits Group!