combination group and individual disability plans
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Combination Group Combination Group and Individual and Individual
Disability PlansDisability Plans
Companies are shifting away from 100% employer-paid programs
Employers are looking at options, including voluntary, payroll deduction products, and combination plans to address real need, but limit their current and future costs
2003 totaled an estimated $5.07 billion, a 19 percent increase over sales for 2002
Source: Eastbridge Consulting Group’s U.S. Worksite Study, 2002
Trends in Worksite SalesTrends in Worksite Sales
Why This Class?
Neither group or individual disability income plans (IDI) provides a complete solution for every employer situation
Group LTD alone does not cover all applicable income high high-earners or those with variable income, ie., bonus or commissions
Group LTD
Designed with a maximum benefit amount designed to protect the majority of employees
Definition of covered monthly income usually is fairly restricted– Often does not cover commissions or bonuses– Even when does cover commissions or
bonuses, usually has an averaging to limit insurance companies exposure
Advantages of Group LTD
Typically cost is borne by employer Covers all eligible employees Cost effective Simple
Disadvantages to Group LTD
“One plan fits all . . . .” Limited ability to personalize to specific
individuals Limited plan design and definitional
requirements, ie., definition of earnings Limited portability Maximum may or may not cover high
earners
Advantages of IDI
Ability to tailor to the needs of the higher earners or certain classes within the group
True portability Availability of riders to personalize
coverage Stronger definitions based on contractual
language Guarantee cost and renewability
Disadvantages of IDI
Cost Effort necessary to create positive sales
environment Underwriting and selection Complication of payroll deduction Education of the participants Enrollment
Individual IDI Buy-Up
Instead of redesign of the core LTD plan, the LTD plan is often ‘capped’ at a level to provide a traditional maximum monthly benefit, however, the individual employees are offered individual policies above and beyond the group maximum
Target is often younger, more highly compensated, professional employees desiring greater or more flexible benefits and portability
Combo Plans
Definition: A combo plan is one which incorporates the group LTD with IDI plans sold to supplement the group coverage
Typically the IDI offering is based on class and is restricted to those with income or occupational need
Often the IDI can be offered with guarantee or simplified issue in these sales situations
What Do Combo Plans Provide?
For the employer– A way to minimize the cost increases found in
today’s market by limiting plan design– Avoids the escalating costs of providing rich plan
designs which run contrary to the employer’s goals
For the employee– Allows the employee to help him or herself, while
providing multi-life discounts, guarantee or simplified issue, and individual design of the program
Combo Candidates
Law Firms Physician practices and clinics Hospitals White-Collar firms Engineering firms Manufacturing carve-outs Sales organizations
0%
10%
20%
30%
40%
50%
5 - 9 10 - 24 25 - 99 100 - 999
Individual Only
Group Only
Both
Number of Employees
Percent of Companies Providing Percent of Companies Providing Employee Disability Coverage Employee Disability Coverage Percent of Companies Providing Percent of Companies Providing Employee Disability Coverage Employee Disability Coverage
Source: Response Analysis Corporation,1994
Discounted ProgramsFully Underwritten
3 or more lives 15 – 20% discount ER or EE paid Unisex rates Supports highly compensated List Bill or PAC
Guaranteed Standard Issue Program Available at 15 to 20 lives 20% + discount with unisex rates 100% participation required G.I. Of $6000 or more based on case size
Generally with LTD Carve out Wrapped around group Reverse carve out
Own-occ-to-65/not working (marketplace definition)
Available riders Residual/partial SIS COLA
No drug/alcohol limitation (no DAMN rider) on employer-paid cases.
How Does The IDI Work?
Employer-Paid Voluntary
Min. Size Group 15 participants 70 or more eligible participants*
Min. Participation 100% required 70+ eligible participants 30%
Occ Class 5AP-3AP3AP cannot be more than 15% of total lives
N/A to medical occupations
5AP-3AP3AP cannot be more than 15% of total lives
N/A to medical occupations
Discounts Discounts range from 20 to 30% off unisex rates depending on the case size.
Discounts range from 20 to 30% off unisex rates depending on the case size.
GI Max Issue Limits
# of Issue Part. Max. GI Amt.**
15-99 $100/life/month to max. of $6000
100+ $8000
# of Eligible Max. GI Issue Participants Amount**
70-149 $3000
150-299 $4000
300+ $5000
Employer-Paid and Voluntary Plan Specifications
*For cases with 15-69 eligible lives, the Home Office will consider making an offer on a Guaranteed Issue basis. Such an offer is contingent on a minimum of 15 paid lives. If fewer than 15 paid lives are written, full underwriting will be required. Discounts and GI maximum Issue Limits are the same as for cases of 70-149 eligible participants.
**The maximum amount available can vary based on the characteristics of the group.
Plan DesignPlan DesignSample IDI Offering
Sample Case
Law Firm 114 EE’s with 30 Partners Partners
– Average age 46– 68% Male– $220,000 Average income
Non-Partners– Average age 41– 70% Female– $56,000 Average income
LTD Plan Design– 60% of income up to a maximum of $6,000 per month
IDI Offer
Partners ER Paid $4,000 per month maximum Pure ‘own occ’ definition Residual Inflation Rider
Example
PartnerGross Monthly Income $17,000Group LTD Benefit $ 6,000Group Replacement Ratio 35%GI Offer $ 4,000New Replacement Ratio 59%
Applicable IRS Regs
Sick Pay Plans– Section 104,105,106 and 162 of the IRS regulations
and Title 1of ERISA serve as the framework for formalized Salary Continuation or Sick Pay Plans
IRC Section 104– Proceeds received from disability or income
replacement insurance plans are not included in a persons’ gross taxable income.
– The exclusion from gross income assumes that the coverage is purchased with after tax dollars
Applicable IRS Regs IRC Section 105
– In order for a sick pay plan to be tax deductible it must be in place prior to a disability.
– Employers do not have to give equal benefits to all employees.
– Requires the employee to include in gross income the proceeds received from employer purchased plans
IRC Section 106(a)– Employer paid disability insurance premiums for individual
or group policies are not included in an employees taxable income.
– Disability income benefits are tax exempt to the employee as long as the employee is paying the full premium.
IRC Section 162 (Executive Bonus)
An employer can deduct a “reasonable allowance” for wages and other compensation for services actually rendered.
Formalized Sick Pay Plan
The Plan must be in writing and describe who is covered and what are the plan benefits
It must be communicated to the covered employees
The benefits available should be put in writing in some form of business memo or letter
Qualified Sick Pay Plan FAQ What is a Qualified Sick Pay Plan? It is a
simple agreement providing for a firm to continue some portion of an employee’s wages during a disability.
What type of firm or business entity may adopt a Sick Pay Plan? Any corporation(C or S), professional corporation, partnership, or sole proprietorship.
When is a person considered to be an employee? When the person is currently performing services or when the person is receiving benefits under the terms of a Qualified or Formalized Sick Pay Plan.
When must a plan be adopted by a firm? Before the employee becomes disabled!
Multi-Life Plans offer discounted premiums
Guaranteed Issue program does not require financial documentation
Guaranteed Issue does not require medical underwriting
Plan design is done at group level
Answering ObjectionsAnswering Objections
Guaranteed issue (larger qualifying groups)
No detailed underwriting process
Discounted premiums on unisex rates
Rapid turnaround of application
Higher income protection
Can be employer paid
Insured WinsInsured Wins
Create perks for key employees Deductible business expense List billing Reduce LTD costs Foster persistency and loyalty among
key employees Allow employer to add an additional
benefit without incurring additional cost
Employer WinsEmployer Wins
No detailed underwriting process; streamlined underwriting
Approach multiple insureds —
Cross-selling opportunities
Discounted premiums on unisex rates
One plan design for all
Multiple sales — more commission $$$
Agent WinsAgent Wins
Questions?????Questions?????
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