Supplemental disability income plans are so mainstream today that they are thought of as plain vanilla.
That’s all well and good until the other shoe falls. And it often does. When employers experience problems with existing voluntary disability plans, most of these issues can be traced back to when the plan was originally designed.
Supplemental plans emerged from a need to address the income disparity between highly compensated executives and rank-and-file employees once the plans kick in. This disparity can become particularly severe when employees are eligible for variable compensation such as bonuses. The industry calls this “reverse discrimination,” since most employees are covered at 60 percent of gross compensation, while those with variable compensation are covered at a drastically lower replacement rate.
The situation is at the point where most employers have made an effort to close this gap by offering a supplemental plan to cover this coverage gap. When designing this coverage, employers should be aware of five common mistakes and how to avoid them. Here they are:
• Deciding not to offer a supplemental plan and opting to change the definition of earnings in the current plan, as well as raising the group long-term cap.
This approach seems to make sense until either of one of two things occurs. By raising the cap to accommodate relatively few employees, the cost for that increase in insurance is spread over the entire population. When this occurs, it turns out to be anything but cost-effective in the long run. It’s downright expensive.
If it happens to seem cost-effective at the moment, just wait until there is a claim or two, and your group rates go through the roof.
• Choosing a very good technology platform over a better guaranteed-issue offer.
Supplemental programs and the insurers that offer them are constantly improving technology so they are able to deliver enhanced enrollment capabilities. Many companies opt for a lower guaranteed standard issue offer so they can obtain what they perceive as a state-of-the-art system. This approach has a strong appeal, and it can put a company in a strong, competitive position.
If the guaranteed standard issue offers are close by perhaps a couple of hundred dollars, choose the technology. However, if there is a substantial cost differential, go with the larger, guaranteed, standard-issue offer. If you do not, the covered employees will suffer during a claim.
Enrollment strategies are critically important, particularly if a company is implementing a voluntary supplemental plan.
Ensure that the plan is well-communicated and that each participant is contacted not only by sending them an enrollment packet, which is the usual practice, but also by a simple phone call. As old school as this seems, it can be the most effective way to answer their questions and to help them complete the enrollment materials. This is particularly important, since most carriers expect that a certain percentage of the employee group will participate. Generally, this percentage is between 20 to 30 percent.
It is critical to reach the particular percentage to satisfy the guaranteed, standard-issue, unlimited offer going forward. If this does not occur, it’s quite possible that new participants may be barred from obtaining coverage.
• Settling for an inadequate guaranteed-issue offer on an employer-sponsored program.
The supplemental disability-income market has changed with the addition of new products. Usually, should the company be paying for the coverage, carriers will issue guaranteed, standard-issue coverage. That’s not all. It is possible to go a step further and layer an additional product that will cover up to 60 percent of highly compensated employees’ total compensation and will cover an income up to $2 million.
• Unnecessarily subjecting your employee-group population to underwriting.
Even though new products are arriving in the marketplace, companies continue to subject their employees to medical underwriting unnecessarily. Since disability income insurance is a complicated process, the risks of having an employee declined, rated or have coverage exclusion are almost assured.
Subjecting employees to underwriting usually indicates a poor plan design.
Supplemental disability-income protection has a strong appeal today, particularly with the unpredictability of the economy that results from employment uncertainty and the possibility of layoffs and buyouts. Offering a supplemental plan that is well-designed and avoids unnecessary pitfalls is more important to than ever for creating employee satisfaction. •
Christopher R. Kristian is executive vice president and managing director of The Westport Group. He can be reached at ckristian@westportgp.com
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