All group disability plans, whether insured or self-funded, allow you to spread risk throughout your client’s employee population to minimize plan costs. But there’s a downside: The risk, or volatility, of the plan is based on the total group experience. So, how can you ensure adequate income replacement for all employees–particularly those in the higher income bracket–while minimizing the volatility of plan experience and pricing?
An integrated plan design capitalizing on the benefits of both group and individual policies may be the answer. It can enhance benefits, diversify risk and potentially reduce future costs for your clients, and give you a unique selling solution.
The concept of risk transfer is relatively simple: Take a self-insured or fully insured long-term disability plan with a high benefit maximum and reduce the benefit cap and supplement the coverage with individual policies for high-income earners. The strategy starts to gain traction as the credibility of the LTD case increases–usually at 1,000 lives or more. This is an especially good solution in a higher income population where one claim can affect plan experience significantly.
Combining a base LTD plan with an individual income protection plan enhances benefits for employees while helping to build a risk-sharing component to stabilize the plan against the possibility of future pricing volatility.
There are 4 key risk-management features that could make this strategy a good solution for your clients:
o Risk is transferred from the client. Individual experience does not affect group pricing, so there is reduced exposure to the impact of a high-income disability claim.
o It’s a long-term benefits solution. This approach promotes stability in benefit planning.
o There’s more rate stability. Individual, non-cancellable rates are fixed and cannot increase (for clients under the age of 65), unlike group LTD premiums, which can increase from year to year based on plan experience.
o Plans are enriched through value-added enhancements. Income protection benefits for highly compensated employees are enriched while equity in the plan design is maintained.
The concept of risk transfer can be used in 2 ways. The first and simplest method is to transfer some of the top-end risk of the client’s plan. For example, consider a 10,000-life LTD case with an LTD maximum of 60% to a $15,000 monthly benefit. Some of the risk can be shifted away from the group plan by reducing the group LTD maximum to $10,000 and providing an individual policy for employees needing extra coverage. The $5,000 group LTD reduction is “transferred” to an individual disability income-protection plan.
The second method helps provide more comprehensive coverage for high-income earners who aren’t adequately covered by a client’s current plan. In this case, if our 10,000-life LTD case had a current $10,000 LTD benefit but many employees needed extra protection, layering an individual policy above the group benefit may make more sense than bumping up the group maximum.
This type of integrated plan produces a kind of “stop-loss” effect, isolating the potential impact that one claim in the executive group has on the group LTD plan experience. This portion of the risk is now shifted to the insurance carrier in the event of an LTD claim, rather than being assumed by your client in the form of plan experience.
While an integrated strategy isn’t a fit for every case, it’s a solid alternative plan design and funding method to consider for your client. Addressing the risk in your client’s disability programs can ensure it has a cost-effective base of employer-sponsored LTD coverage without unnecessary volatility.
An integrated plan offers benefits for your client’s employees, too. Because a portion of the coverage is individually owned, employees can take advantage of portability features. In addition, individually owned coverage is available with fixed rates based on a discounted worksite rate structure. Some carriers let employees exchange the disability insurance for long term care insurance without providing evidence of medical insurability.
Joseph Heaney is a vice president and managing director in the New York office of UnumProvident Corp., and Branden Pierson is a regional sales manager for supplemental benefits in the company’s Portland, Maine, office.
Combining a base LTD plan with an individual income protection plan enhances benefits for employees