I received a call from a close friend who asked me to review his employer-sponsored disability program with him. In review of his firm's group plan, we found that the benefit was 60 percent of income to a monthly maximum of $3,000 per month. This plan would cover an individual making $60,000 a year or less for a full 60 percent of their monthly income. However, my friend is an associate partner in a law firm making well over $60 thousand per year, and is severely underinsured in case of a catastrophic accident or illness.

Unfortunately, higher-paid working Americans often assume that either their employer's group disability plan or Social Security will pay an adequate benefit should a disability occur. Over time, I have dealt with three executives, stricken with career-ending disabilities, who each found out too late that they were underinsured for disability coverage for one or more of the following reasons:

• Their group plan was not adequate coverage. Monthly group maximums normally cover employees making between $60 thousand and $100 thousand a year.
• Their group plan did not cover bonuses and other compensation, which represented a significant percentage of their income. (Twenty years ago, base pay was 90 to 100 percent of compensation. Today total income is composed of base pay, commissions, bonuses, stock options, etc., with base salary sometimes being less than 50 percent of total compensation).
• The benefit received is taxable because the employer paid the premiums and/or the employee's share of the premiums were paid with pre-tax dollars. A 60 percent taxable benefit becomes closer to 45 percent income replacement.

In working with employers, I find that one of the most overlooked employee benefits is disability coverage, especially for higher-paid employees and executives. Most companies want to provide all employees like benefits, but in the case of disability coverage, it is possible to discriminate against the higher-paid employee. Companies will quickly provide a country club membership or company car to key employees, but overlook the fact that they are not covered for a catastrophic accident or illness.

This gap in protection can be solved several ways:

• Raise the group long-term disability maximum. This allows for higher-paid employees to be covered, but increases the risk and cost on the group plan.
• Gross up the employee's pay and deduct the disability premium, which makes the disability benefit tax-free. This helps, but does not solve the larger problem.
• A third option is to layer an Individual Disability program on top of the group plan. I often recommend this to companies because it solves several company issues and reduces the gap in coverage as follows: |
  1. It provides additional coverage to supplement the gap in income – up to 75 percent income replacement may be offered – and bonuses and other compensation may be included in the calculation.
  2. Depending on the size of the group and insurance carrier, the coverage may be written with a certain level of guarantee issue (little or no basic health questions).
  3. This plan may help attract and retain key employees and at the same time the premiums the employer pays are deducted as a business expense.
  4. Most polices are portable and some may be converted to a long-term care policy at retirement.
  5. This approach is cost-effective, can be administered easily, and promotes long-term stability with the employer's group plan.

As an employee, you should review your employer's group plan to determine exactly what level of coverage is provided, then consider purchasing additional protection. As an employer you should review your plan and consider the adequacy of it's coverage for your higher-paid key employees. The last thing you want is for a catastrophic disability to strike one of your key employees who is underinsured at a time they need the protection the most.