There are many different ways benefits are calculated, so this can be complex and confusing. Some employees are covered at 60 percent of compensation, while others are actually covered for as little as 20 percent to 30 percent of their net takehome pay after taxes. For example: The bank EVP earns $200,000 base salary and a $100,000 bonus ($25,000 gross monthly income). The group benefit provides 60 percent base salary only, to a maximum $10,000 of monthly benefit. This means only 40 percent of her income is protected. The IDI will provide $5,000 of additional coverage to adequately protect 60 percent of total compensation (see chart, left). Letâ€™s look at another scenario. Bob is the vice president of market development at a bank, earning a $200,000 annual salary and $100,000 bonus, and suffers a stroke. The bankâ€™s group plan provides 60 percent of annual salary and the benefit is taxable. His original, pre-disability, after-taxes take-home pay was $16,250 per month, or $195,000 ($200,000 + $100,000 minus 35 percent tax). Now his disability after-tax benefit is $10,833 ($16,667 minus 35 percent tax) or $130,000 annually. Bob must now live on 67 percent of his pre-disability take-home pay.
When a bank offers this program, there are some major advantages: the policies can be guaranteed issue with no medical underwriting required and rate discounts can be up to 30 percent. This is available for both bank-paid and voluntary options. Otherwise, if an individual tries to purchase this coverage on their own, it is subject to full medical underwriting and frequently gets a rate surcharge, benefit exclusions or outright declined.
Fortunately, there are supplemental disability insurance products available to solve the problem, and they can either be firm paid or voluntary. This coverage is known in the insurance industry as individual disability insurance (IDI). It is designed to provide comprehensive benefits in the event of partial or total disability with monthly income and own occupation protection to age 65.
Supplemental disability income protection has a strong appeal today, particularly with the unpredictability of the economy that results in employment uncertainty. Employers should review their disability programs to determine how best to solve the problem and they should be educated in the limitations of their current disability programs, as well as the supplemental products and strategies available to fill the gaps in coverage. BNE
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