Layering Long-Term Disability Benefits

Closing the Income Replacement Gap for the Highly Compensated

Long-term disability insurance is an important benefit that ensures your employees will be taken care of in the event of a serious injury or illness. Most companies offer group long-term disability coverage with a 60 percent salary replacement and a maximum of $10,000 or $20,000 per month. These monthly maximums are appropriate for the majority of employees, but for some highly compensated staff, these maximum limits create a large gap in coverage of monthly earnings. For employees and partners of law, investment and consulting firms, along with other professional services firms, salaries well above $1 million per year are not uncommon.

A Unique Challenge

The firm represented in this case study has top earners with average salaries in excess of $130,000 per month. The client’s long-term disability program was structured with a group monthly maximum of $20,000 plus an additional $5,000 from voluntary individual coverage. The program provided a maximum monthly income replacement of $25,000, which was sufficient for employees earning an annual income of $500,000 or less at the 60 percent benefit level, but the firm has many employees and partners that exceed that income. For those high-earning employees, the necessary replacement income would be approximately $78,000 per month, leaving a gap of $53,000. The group insurance market for this level of income replacement does not exist, so a creative solution was necessary.

A Collaborative Approach

RCM&D worked in collaboration with the client to perform an extensive review of their workforce demographics. Additionally, our benefits experts completed an in-depth cost analysis of all available options, taking into account the financial impact to the firm and the cost implications to the equity partners. The client ultimately decided that the top earners did not need a benefit that would cover 60 percent of their income, but the objective was to improve the current $25,000 monthly maximum benefit as much as possible.

An Innovative Solution

RCM&D’s employee benefits experts created a layered benefit structure that resulted in a maximum monthly benefit of $45,000. The approach was comprised of long-term disability coverage with an increased group monthly maximum of $25,000, an individual long-term disability benefit of $10,000 monthly and a voluntary individual benefit of $10,000 monthly. In total, this layered benefit structure provides adequate income replacement for all levels of compensation within the firm, while keeping the costs at an acceptable level for both the firm and its equity partners.

A Layered Structure for Optimal Coverage

RCM&D’s creative approach allowed the firm to increase its monthly maximum benefit from $25,000 to $45,000. The firm felt that this monthly benefit amount would be more than sufficient for highly compensated employees, because their salaries allow savings for unplanned events, while still being affordable to the firm. See below for a comparison of the firm’s original plans compared to the new benefit structure.

Previous Disability Coverage

Total monthly maximum: $25,000

Layered Benefit Structure

Total monthly maximum: $45,000