On the surface, mere seems to be little in common between John and David. John is president of a small manufacturing company and is in his mid-thirties; David is a CEO of a shipping company in his mid-forties. What they share is a major financial problem. Unwittingly, they both relied on a company benefit that was inadequate for their personal financial situation.
Both men suffered a disability. The good news is that they both had disability insurance through their company. The bad news is that the coverage was through group policies. Although group long-term disability coverage is often adequate, you should not assume that it will cover all your needs; this is particularly true if you are a chief executive.
When thinking about disability most people think that “it will never happen to me.” Accidents, however, do happen. It happened to John and as a result he was disabled for a year.
John slipped as he was getting out of his boat and fell on the boat dock cleat. The result was a ruptured spleen. He was in the hospital for the first two months. After that he was physically able to go back to work on a part-time basis, gradually increasing his hours until he was working full time. The process took a total of 12 months. Unfortunately, John’s policy only covered total disability. After his hospitalization, he was no longer able to claim total disability and thus lost his benefit.
David’s disability is the result of severe mental depression that was brought on by the tragic death of his 12-year old daughter. The prognosis is that David will be back to work full time, hopefully within the next year or so.
However, his recovery has been hampered by the economic stress that his disability has brought about. When David was working, his income was just topping $200,000. The disability coverage his company provides replaces 60 percent of income up to a maximum benefit of $3,500 per month. As a result, his gross income has dropped from $16,000+ per month to $3,500 per month.
HOW MUCH IS ENOUGH?
Deciding how much disability coverage you need is a complex two-step process and should be done within the context of your own personal financial plan and with the aid of your planner.
First, you need to analyze your own financial situation and what effect a longterm total disability would have on it. You need to determine how much income your other assets would produce and for how long? You also need to know what your major financial commitments are. In addition, don’t forget to consider the extra expenses that may arise due to your disability. In one unfortunate case, a man who died of a brain tumor needed 24 hour supervision in the last three years of his life.
The second step is to evaluate your company’s disability insurance or salary continuation plan. How much coverage would it provide you? Even with a cap on benefits that is as high as $5,000, executives that are making only over $100,000 will not be fully covered. The company or the individual, in this situation, will need to buy additional coverage to close the gap between $5,000 and 60 percent of his/ her salary plus bonuses (in special circumstances up to 78 percent can be covered).
Another important consideration in the evaluation of your company’s benefit plan is how long you would receive the benefits and would you receive benefits for a partial disability? In John’s situation, the lack of partial disability coverage can be a major problem for him, the employee. It is also a problem for the employer. Any company would certainly want the executive back even on a part-time basis, but could it afford full-time compensation?
In terms of duration of benefits, 60 months or five years is a common length for group disability plans, particularly for manufacturing firms. However, there are many disabilities such as multiple sclerosis or a head injury that incapacitates the person but does not shorten his life.
WHEN YOUR BENEFITS ARE NOT ENOUGH
If you decide that your group coverage leaves you more exposed to risk than you wish, you will need to buy individual coverage. There are two ways to do this. One is to opt out of the group plan altogether. The second is to buy individual coverage that will take over where the group plan’s coverage ends. It is not unusual for chief executives to negotiate for additional individual coverage paid for by the company.
You want a policy that is non-cancellable and guaranteed renewable. You also want a policy that covers you for your own occupation and, of course, one that provides partial disability coverage whether or not you are ever totally disabled. An example of one company many executives are turning to is the Paul Revere Life Insurance Company, a nationwide leader in long-term disability life insurance, based in Worcester, Massachusetts. This company offers a combination plan where it will combine a group benefit with an individual policy.
The benefit this company can offer an executive making $200,000 is approximately 78 percent of his or her income a month if the company writes both the group and individual policy.
There are other “bells and whistles” that are important, though not essential: the cost of living rider and the automatic increase in benefits rider.
AT A MINIMUM …
Going through this analysis is important whether or notyou think it can ever happen to you. A well constructed financial plan considers all the major financial risks that a family can encounter. And although you may decide not to insure yourself against the risk, this is a decision that should be made actively, not by default because you never took the time to evaluate your situation.
Remember, accidents can and do happen.
Carol Nathan is a member of the IAFP and the president of Metrowest Financial Group, Inc., a Framingham, Mass.-based financial planning firm.