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The Devil is in the Details
Prescott Pailet Benefits LP • Employee Benefits
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When it comes to disability insurance, don’t just assume you’re covered—drill down to the details.
Most attorneys understand, at least in theory, that disability insurance is important and that their greatest asset is their ability to earn an income. But when you actually run the numbers, the results are startling. Let’s say an associate at a law firm earns $150,000 a year. She is 35 years old and plans to work another 30 years. Even if she never received a pay raise, she would expect to earn $4.5 million at the end of those 30 years. If she suddenly became disabled, how will she earn an income to survive?
Drill Down to the Details
No big deal, you say. “My firm has a group long term disability plan, so I’m covered.” Maybe. Do you know the plan’s details? Disability plans are full of grey areas. Most are set up by company personnel, who may not be insurance experts and, furthermore, often are tasked with finding ways to cut costs. Of course, nobody wants to pay more than necessary, but nor do you want to pay for something that won’t fully protect your income.
We see gaps in coverage all the time when we review firms’ disability plans. For example, one of our clients, Gruber, Hurst, Johansen, Hail, was about to sign a long term disability contract, and they asked us to review it before they moved forward. After a thorough analysis of the contract, we found a restriction that could have resulted in someone not receiving a benefit, even if they lost significant income. With just a slight adjustment in the contract, the firm was able to ensure that all of its employees would receive the income protection they need.
Although contracts can look similar on the surface, a more thorough reading can reveal drastic coverage differences from contract to contract. A standard disability plan that works for a production facility or manufacturer may not work well for a law firm.
Look Out For Limitations
For example, many disability plans don’t consider somebody to be disabled if they are able to work 40 hours, a normal work week for most occupations. However, the majority of attorneys work more than 40 hours a week and would suffer significant loss of income if they were denied benefits after being released to return to work for only 40 hours a week.
In addition, some policies require both loss of occupation and loss of earnings for a claimant to qualify as disabled. Loss of occupation generally means that the employee is unable to perform at least one material duty of his regular occupation. More restrictive contracts require the claimant to lose a “majority of duties.” Loss of earnings generally means the employee is unable to earn at least 80% of their pre-disability earnings. Other policies will provide benefits if the claimant suffered a loss of occupation or loss of earnings. Although it might seem minimal, the difference between “and” and “or” is significant when it comes to determining whether you’re eligible for a disability benefit.
Know Your Options
Most disability plans cover only the employee’s base wage, but many attorneys receive 25% or more of their income in a year-end bonus. When you factor in the bonus, payments only replace about 40% of income, which often is not enough to pay the bills. See Figure 1 below.
Although group contracts can be worded to cover a bonus, the expense is often prohibitive. There are solutions in the marketplace to supplement a group contract with individual coverage on a payroll deduction basis. These products are guarantee issue and rates are typically discounted 25-30%
Other options are available that would pay an additional 40% in benefits in the case of a catastrophic disability where there is no chance of returning to work and they meet certain criteria. The additional premium to add this rider is relatively low, but the pay out would be huge.
Make No Assumptions
Sure, you can get a more economical rate for a basic LTD contract. Just make sure you understand what you are getting and that there are no gaping holes in your coverage. Budgets are a reality, and sometimes you have to give something up to gain something you believe is more important. The problem is that often the partners in a law firm don’t realize they have gaps in their coverage and could be discriminating against themselves. Be sure your firm is making an informed decision so that, if you should ever have to use the policy, there will be no surprises and you’ll have the coverage you need.
Figure 1: Income Replacement Grid*
Base Wage Bonus Total Wage Benefit Income Replacement
$50,000 0 $50,000 $30,000 60%
$100,000 $25,000 $125,000 $60,000 48%
$200,000 $50,000 $250,000 $120,000 48%
$300,000 $100,000 $400,000 $180,000 45%
$500,000 $250,000 $750,000 $180,000 24%
*Assumes group contract of 60% to $15,000 (Base Wage Only)
In this example, actual income replacement is typically far less than the 60% stated in the LTD contract. Anyone making greater than $300,000 or earning significant bonuses is being penalized!