Navigating the Limitations of Group Long-Term Disability Plans: A Guide for Consultant Partners and Benefit Managers

Group Long-Term Disability (LTD) is a common benefit offered by employers to provide income protection for employees unable to work due to an illness or injury for an extended period of time. While these plans are valuable, they often come with restrictions and limitations that can impact the coverage provided.  

For example, most Group LTD plans provide only a percentage of income replacement up to a specific monthly maximum, likely covers only base compensation and includes an offset for Social Security Disability benefits. To address these restrictions, benefits managers can work with consultant partners to review and potentially enhance the Group LTD plan. This may involve increasing the maximum monthly benefit, adjusting the income replacement percentage, or offering Supplemental Individual Disability to solve for the deficiencies in coverage. 

Another consideration is to understand the role these plans play in recruiting, retaining and rewarding key talent. In executive compensation benefits packages, Long-Term Disability plans play a critical role in providing financial security for key employees.  

Key employees often have higher incomes and more complex financial situations, making them vulnerable to financial hardship in the event of a disability. Many key employees are underinsured and under-protected, and when made aware of these deficiencies, choose to take the necessary steps to safeguard their futures and the financial safety of their families. 

However, to the detriment of their talent, few organizations thoroughly examine their benefits to understand how they impact all employees. While this is unintentional, it is important for benefit managers and consultant partners to grasp these restrictions and effectively communicate them to ensure employees are aware before it is too late.  

Below, we take a closer look at five common restrictions and explore alternatives to address them.   

5 Common Restrictions in Group LTD Plans: Understanding Their Impact 

1. Limited Maximum Monthly Benefit: According to Group Market Share (GMS), 95% of Group LTD plans sold in the past three years have a maximum monthly benefit of $15,000 or less. * 
2. Income Replacement Percentage: 89% of these same plans provide only 60% income replacement, and over 70% of those plans are "non-contributory," making the disability benefit taxable to the claimant.* This means that the actual benefit received by the claimant may be significantly less than expected. 
3. Offset for Social Security Disability Benefits: 99% of Group LTD plans include an offset for primary and family Social Security disability benefits, meaning the benefit is reduced by Social Security disability benefits received.* This can further reduce the amount of income replacement provided by the plan. 
4. Limited Own-Occupation Coverage: 81% of Group LTD plans provide own-occupation coverage for just two years.* After this initial period, the definition of disability often changes to any occupation, which can make it more difficult for executives and key employees to qualify for benefits. 
5. Exclusion of Bonuses and Incentive Compensation: Most Group LTD plans do not include bonuses, commissions or incentive compensation as "covered earnings." Since a sizable portion of executives' and key employees' earnings often comes from these sources, this limitation can result in a substantial reduction in benefits. 

Exploring Alternatives  

Given the limitations of Group LTD plans, it's important for consultant partners and benefit managers to explore alternative options for income protection. Supplemental Individual Disability insurance can provide additional coverage not available through a Group LTD plan. These policies can be tailored to the individual's specific needs and provide more comprehensive income protection. 

Conclusion 

While Group LTD plans provide important income protection benefits, they come with limitations and restrictions that impact coverage. Companies, consultant partners and benefit managers should carefully review these limitations and explore alternatives to ensure adequate income protection for individuals covered under these plans. This analyzation and action can help you retain and reward key talent in your organization.   

That's where we come in.  

At TIP, we understand that in a talent-driven landscape with intense competition, you must future-proof your workplace and protect your top talent from life’s uncertainties. As a leading wholesale executive compensation benefits advisory firm, our mission is clear: to empower consultant partners to help their corporate clients recruit, retain and reward top talent. Whether it’s disability, death, or retirement, we ensure peace of mind and a quality of life for key employees and the families.  

Contact Keith Johnson at keith@theinsurancepartners.com to learn more.  

The statistics in #1-4 as provided by Group Market Share (GMS) are based on approximately 120,000 Group LTD plans sold over the past three years with approximately 95% of cases sold in the market represented. GMS is a firm which provides benchmarking and data analysis tools for 20+ U.S. Group Insurance Companies. GMS compiles and reports data for Group Life/ADD, Long Term Disability, and Short-Term Disability product lines. GMS expanded its product set in 2019 to include a Dental database. Beginning in 2021, GMS will also begin offering a suite of Supplemental Health data sets to include Accident Insurance, Critical Illness, and Hospital Indemnity. Participating carriers access data and reports through a web-based tool to identify areas of competitive advantage, build on successes, and protect dominant market positions to maximize profitability and growth.