Is Executive Disability Income Insurance Right for your Financial Institution?

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(Last Updated On: November 10, 2020)

51% of employers believe using benefits to retain employees will become even more important over the next three to five years. What about at your financial institution?

The cost of replacing an employee can be between 3 to 18 months of their salary. Imagine you have a supervisor making $100,000. It could cost $150,000 to find a suitable replacement. And that money isn’t going to someone doing a job!

How do you avoid this cost in time and payroll? Reduced turnover, great recruitment, a culture of inclusiveness, and loyalty benefits with high perceived value.

This applies especially to your C-Suite. Attracting the best talent that fits your culture is critical to your bank or credit union’s bottom line. Benefits are a valuable part of that strategy. Show your support of your team’s well-being with tangible perks.

Doing Rubix Cube
Attract and retain the talent you need. Because these things are frustrating!

A robust benefits package can thus serve to help attract and retain, while also adding to the functional stability of your institution.

This article will discuss one benefit we encourage you to consider: Executive Disability Income Insurance. Below, we’ll explain its need, design, and value to your institution and staff. By the end, you’ll be able to decide if it’s a benefit worth pursuing for your team.

Why Executive Disability?

There are a lot of exciting benefits to provide to your employees. Paid vacations and retirement plans compose the “old-school” perks. In a post-COVID-19 world, flexible schedules and locales, alongside in-home daycare, will attract massive interest.

So why focus on disability? The Council for Disability Awareness reports that more than one in four of today’s 20-year-olds will be out of work for at least a year, due to a disabling condition, before they reach retirement.

As of August 2020, 55% of US workers pass on disability insurance, including 7 out of 10 Baby Boomers. That, despite 47% of all long-term disability claims coming from their generation. Source: Unum

It’s something people don’t consider until the need arises. Then it’s too late. Providing a robust executive disability plan can help your C-Suite team maintain their standard of living if a crisis arises.

Plus, with millions of COVID-19 cases, and unknown long-term impacts, disability coverage may be even more essential down the road. Help provide the assurance your executives want for themselves and family.

Man in Wheelchair

Three single largest causes of bankruptcy filings

  1. Medical bills
  2. Lost job
  3. Illness or injury, either for the individual or a family member

How can executive disability help? The benefit can help protect your employee’s financial wellness. It does so through providing coverage commensurate with their income level.

However, an employee’s current income is not the only risk. Retirement plans may lose funding when employees become disabled. Contributions and employer matches stop, putting the executive’s financial stability into retirement in question.

Mitigate Risk & Protect Employees

You’re in the business of risk mitigation. Your team values an employer which does something about it for their own protection. Ensuring your C-Suite is cared for in case of disability can be a key recruitment and retention tool.

Regular (Group) Vs. Executive Disability

“We already offer disability coverage to all our employees!” That’s a great start. It just may not scale across all staff levels. Group long-term disability may only cover 60% of lost income, with a $5,000-$10,000 per month cap.

Not an issue for the majority of your team. How about executives with six-figure salaries?

Fuel Gauge
Ensure their financial protection tank is full!

For them, your group coverage may provide less than 40% of their normal salary. In this case, your C-Suite receives inferior benefits compared to your other employees.

Executive Disability Allows Customization

Group long-term disability policies apply the same to all your staff. That’s great for management and expectations. However, your executive benefits may have specific requirements or goals. Executive disability plans let you customize to fit.

Elimination Period

For example, group policies include an “elimination period.” This is the amount of time an employee must wait before benefits start. Typically, elimination periods are 90 days from the time of injury or illness.

Your institution may choose shorter or longer periods, the former coming with higher premiums. We believe this time should be kept to a minimum for all covered staff, however, we understand varied budgeting requirements.

The executive disability plan lets you adjust this value to attract, retain, or meet expectations of the C-Suite.

Accounts for Alternative Forms of Income

Financial Analytics

Regular disability coverage may not factor in the range of income sources your executives have. Bonuses, commissions, stocks and other incentives can significantly influence their actual take-home pay.

Executive disability plans bridge this gap, ensuring they retain a significant portion of their income after being unable to work.

Example: CEO with annual compensation of $350,000 ($29,167/month). A general long-term disability plan with a monthly max of $10,000 provides your disabled CEO only 34% of their income. Supplementing with executive disability could increase their income up to 75% of what they were previously earning.

What about Workers’ Compensation & Social Security?

“We pay into workers’ compensation and social security. We’ll be fine.” Slow down, there. These are important safety nets, but they are not the same and have radically different terms.

Walking with Crutches

Workers’ compensation only covers disability that results from an illness or injury that is work-related. The top reasons for disability are:

  • Arthritis
  • Heart disease
  • Diabetes
  • Depression
  • Stroke
  • Cancer

Most of these are not work related. Executive disability income insurance protects your executives from the devastating financial impacts of these and other possible conditions.

Social Security Disability Insurance (SSDI) also presents challenges filling income gaps. The biggest is the approval rate for claims. Between 2006 and 2015, only 34 percent of SSDI claims were approved.

Of those approved claims, the average benefit paid in January 2018 was $1,197 per month. That’s far from sufficient to fill almost any income gap, especially your executive’s.

Finally, the process for integrating long-term disability with Workers’ compensation or SSDI is complicated, and sometimes impossible.

For example, once you begin to receive Workers comp, some long-term disability policy benefits are void. Others reduce the amount dollar-for-dollar, based on how much you are receiving from SSDI or Workers’ Comp.

Bottom line: Don’t rely on receiving a combination of all expected benefits. Those funds will have to come from elsewhere.

Who qualifies for Executive Disability Income Insurance?

Two Businesswomen Talking
Photo by Amy Hirschi on Unsplash

You decide! Each financial institution can choose who qualifies for its executive disability benefits. A popular method at banks and credit unions is to design a program based on job title or income level.

Examples of possible criteria: 

  • All C-level employees qualify
  • Employees earning $200,000 or more annually

What’s the minimum number of beneficiaries?

With as few as five participants, many carriers will offer discounts and issue guaranteed policies. That means no cumbersome medical underwriting requirements and thus, employees cannot be excluded due to pre-existing conditions.

How is Executive Disability structured?

White Stones Piled
Neatly stacked one on the other, just like your disability programs!

Executive disability insurance supplements your long-term group disability program. While the latter provides a flat income percentage for all members, executive disability is always a custom Individual Disability Insurance contract.

Why? This lets your executive participants get customized policies based on their bonuses, commissions, and other forms of compensation. It ensures your highest earners get a comparable income percentage to the rest of your staff.

How is Executive Disability coverage funded?

In other words, who pays for it?

Support can come from your financial institution, the executive, or a combination of both. Company-sponsored individual policies provide valuable protection for the employee while adding to the benefit package of the institution.

Bank/Credit Union-Owned Life Insurance (BOLI/CUOLI)

For some banks, executive disability insurance is paid through a Bank-Owned Life Insurance (BOLI) policy. The credit union equivalent is, unsurprisingly, Credit Union-Owned Life Insurance (CUOLI).

Let’s quickly discuss what those are, and why you may care.

Banks and credit unions purchase life insurance policies for a group of executives. The financial institution owns the policy, and is thus the beneficiary. Premium payments go into a specialized trust account.

Employee benefits are paid from this fund’s proceeds. Why the complexity? It’s actually an investment tool for the financial institution, as well as a tax benefit.

Putting these funds in a higher interest rate investment helps credit unions, specifically, afford these more competitive benefit packages. Plus, gains and payouts are tax-free, so BOLIs and CUOLIs can help put money at rest to work.

We have a Learning Library section on investments you may consider at your financial institution.

What are the individual tax implications of Executive Disability Income Insurance?

Tax Documents
Photo by Kelly Sikkema on Unsplash

Whether or not disability benefits are taxable depends on who paid the premiums.

Financial institution:

  • Recipient pays taxes on the benefits received (if they become disabled and claim)

Executive:

  • If paid with after-tax dollars, disability benefits are tax-free*

Is Executive Disability Income Insurance right for your Institution?

There’s no one answer to this question. We hope this article helped illuminate the reasons to consider. Like other aspects of talent acquisition, you know how competitive benefits can be. This may help you put another “feather in your hat” of executive perks.

To review, your executives receive a disability plan that provides peace of mind, ensuring they receive 65-75% of their current pre-tax income. It’s something they cannot purchase themselves, or at least not at a comparable cost. So, uniqueness. 

Additionally, the policies are portable. They remain in place so long as premiums are paid, and they belong to the executive. That said, they can also help contribute to your institution’s investment strategy through BOLI/CUOLI policies.

Everyone wins.

Serving Members & Staff

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*GreenProfit Solutions, Inc. does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

Joe Winn - CU Geek

Blogger. Speaker. Part-time Jedi.

Focused on helping your bank or credit union grow in the face of emerging challenges.