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February 23, 2005 at 07:00 PM
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As a young, single woman in the insurance business, my natural market is with young, single professional
s. Therefore, disability income insurance products are among my best friends in the business because the policies are age appropriate to my primary demographic market.
Yet when I look at other disability insurance professionals, I cant help but wonder if some are missing opportunities hidden in the DI business and even the employee benefits business. Often, when working with a new individual or group client, I find a gap in coverage that reveals such an opportunity. One example is in the area of salary continuation plans (SCPs).
Group long-term disability replaces income of an employee if disabled for typically longer than 90 or 180 days. This benefit can provide 60% of an employees gross salary. However, the Internal Revenue Service can consider this money taxable as ordinary income and the employee may actually get closer to 40% of income after taxes.
Group long-term disability plans frequently discriminate against highly compensated employees. Most group contracts provide coverage to a monthly maximum. In our office, that can range anywhere from $6,000-$7,000 of pretax monthly benefit, to $10,000 if the carrier is impressed by the companys demographics.
Lets suppose a contract guarantees coverage to a maximum monthly benefit of $10,000 for 1 year, making the maximum benefit $120,000 annually (60% of a $200,000 salary). Many workers could live with this amount on a pretax basis every year, but for those accustomed to a $200,000 annual salary, the $120,000 benefit may not seem enough. Say the CEO of start-up XYZ earns $250,000 annually, has 40 employees and pays private school tuitions for her 3 children. After taxes, that $120,000 probably will not cover her mortgage and the private school tuition of the 3 kids, let alone everyday expenses. It is in this type of situation that a SCP using DI can really helpand it can boost the value of the advisor in the process.
How It Works. Here is the typical process for establishing a SCP. Once the plan is adopted, the employer purchases individual DI insurance policies for key employees. The premiums are deductible business expenses (IRC Sec. 162), and the key employees income is protected to 75%. In the end, key employees receive income replacement should they become disabled while the cash flow of the employer remains protected.
Under a traditional SCP, the additional income provided by the SCP is still taxable to the employee. Benefits received by a disabled employee under a formal plan will be taxable as income (IRC Sec. 61). In some instances, a tax credit may be available (IRC Sec. 22).
