Welfare Plans (Life and Disability Insurance)
While broad-based welfare plans such as group long term disability (LTD) and group term life insurance provide sufficient coverage for most employees, many executives, partners, physicians, and highly compensated employees are often left with a significant coverage shortfall.
To keep costs reasonable, group plans are limited in the types and amounts of covered compensation. For example, most group plans cover only base salary, ignoring the variable income that comprises a large portion of pay for an executive or sales producer. A typical group LTD plan is limited to $10,000 to $15,000 per month – leaving those earning above the plan limits with far less than the usual replacement target of 60%. Similarly, group term life plan benefits are often limited to $500,000 – leaving those earning $250,000 or more with less than the "two times" target.
Aon Hewitt's Executive Benefits practice mitigates these coverage gaps through the use of individual products – Executive Life Insurance and Executive Disability Insurance. These products can be used to craft a cohesive program for key staff offering discounted rates and little to no medical underwriting.
An Executive Life plan replaces or supplements group term life insurance benefits for highly compensated employees using individual life insurance policies owned either by the company or the covered employee. Executive life plans are often portable, provide higher coverage levels, and reduce executive taxation. While group plans generally only provide a pre-retirement benefit, most executive life plans also provide some reduced level of post-retirement benefit.
While most companies have focused on executive benefit shortfalls in retirement and life insurance coverage, disability has frequently been ignored. But in fact, group disability program limits usually provide insufficient replacement ratios for executives. Furthermore, most group plans do not recognize and cover incentive compensation, which has become an increasingly significant percentage of executives' annual income. The use of individual disability insurance contracts, sometimes integrated with the group plan, is the most effective way to fill this void.