Are you doing enough to protect your highest earners?

This article will ... Explain why standard employee benefit programs often fall short for your highest-paid executives. Illustrate how monthly benefit caps create a significant income gap for highly compensated employees. Explore supplemental insurance options to provide adequate protection for your key executives.

Your company probably offers a great benefits package to your employees, including health insurance, disability income (DI) insurance and life insurance. But many of these benefits programs are designed to appeal to all of your employees equally.

As a result, your benefits package may not be adequate, relative to salary, for your company’s top earners. This disadvantage may be seen when it comes to disability income and life insurance.

Understanding the income gap in GLTD

Group long-term disability insurance (GLTD) offered through your company can be a valuable employee benefit. Many employees have come to expect their company to offer GLTD, and it is important to meet their expectations. Indeed, the Insurance Information Institute suggests that more than half of large and mid-sized companies offer such benefits to their workers.

But a GLTD policy usually comes with limitations. For example, the plan may only cover 60 percent of an employee’s base salary (bonuses and commissions are often excluded), have monthly caps, and the benefits paid may be subject to income tax. These factors all contribute to what is called the income gap — the difference between an employee’s pre-disability income and his or her net GLTD benefits. (Related: The reality of workplace disability income insurance)

The income gap can become larger for employees who earn high salaries. Due to the plan’s monthly benefit cap, high earners can receive significantly less than 60 percent of their salary if they become disabled.

 

 

To quickly determine which of your employees may be adversely affected, simply double the GLTD’s monthly cap, and add a zero.

Example:

$5,000 (monthly cap) x 2 = $10,000. Add a zero = $100,000. For an employee who earns more than $100,000 per year, GLTD may provide less than the traditional 60 percent coverage.

With the formula above in mind, look at your company’s high earners. How will they, and their families, fare financially in the event of a disability?

Why group life insurance may fall short

A group life insurance benefit can pose a similar situation for your top executives.

Typically, group life insurance offers two or three times an employee’s annual salary. This may meet some of the executive’s life insurance needs, but probably won’t meet all of them. (Related: Group life insurance explained)

Your higher earning employees most likely have more costly lifestyles, larger mortgages, and higher monthly expenses than the majority of your employees. In the event of a key employee’s untimely death, their families and loved ones may not have enough life insurance coverage to meet their needs.

Executive benefit solutions for high earners

There are many options available to a company that may be looking to provide more protection to its top earners.

Individual DI insurance and life insurance made available to select employees, either on a voluntary or employer-paid basis, is one way to reduce coverage gaps created by group coverage. This added option provides high earners with a means to address any shortfalls in coverage. (Related: The executive bonus that keeps on giving: Section 162)

Adding the availability of insurance policies to your executive benefits package can be advantageous for the company, as well. Premiums paid by the company for DI insurance can generally be deducted as a normal business expense. The same is true for life insurance when the premiums paid by the employer are also considered income to the employee.

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Frequently Asked Questions about protecting high-earners

Q. What is the income gap in group long-term disability insurance?

A. The income gap is the difference between an employee's pre-disability income and their net GLTD benefits. For high earners, monthly benefit caps often result in coverage that falls well below the standard 60 percent of their salary.

Q. How can employers provide better disability coverage for high earners?

A. Employers can offer individual disability income insurance as an executive carve-out or voluntary benefit. This helps close the coverage gap created by standard group policies and serves as a powerful retention tool.

Q. Is group life insurance enough for top executives?

A. Group life insurance usually offers two or three times an annual salary, which may not cover the higher living expenses and mortgages of top executives. Supplemental key employee life insurance or individual policies can help adequately meet their families' needs.

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This article was first published in March 2017. It has been updated.

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