Supplemental disability income plans are so mainstream today 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.
No one wants problems, particularly when they involve serious health or disability issues. As many an employer can attest, mistakes do occur, and they often create unnecessary complications and unhappiness.
By avoiding the five most common mistakes, companies can increase the chances of having their plan run well and having it valued by employees.
Supplemental plans emerged from the need for increased disability protection from the income disparity between highly compensated employees and rank and file employees.
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% of gross compensation, while those with variable compensation are covered at a drastically lower replacement rate.
Most employers have made an effort to close this gap by offering a supplemental plan. In effect, supplemental plans are individual disability products offered at deeply discounted rates. They usually are written on a guaranteed standard issue basis. Even so, when designing this coverage, employers should be aware of five common mistakes and how to avoid them.
1. 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 plan's long-term disability cap. This approach seems to make sense until 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. In fact, it's downright expensive.
Risk-sharing approach
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. That's when most employers with this problem begin scrambling for a better solution. Typically, this particular scenario can be avoided by using a risk-sharing or risk-transfer approach with a supplemental plan.
2. 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're 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 has a strong appeal, but seems designed only to provide ready-made bragging rights at industry get-togethers.
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.
3. Failing to develop a well-thought-out enrollment strategy. 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 through an enrollment packet, but also through a simple phone call so employees can have their questions answered.
Communication key
Communication is particularly important since most carriers usually expect 20% to 30% of the employee group to participate. It is critical to reach the target to satisfy the guaranteed standard-issue unlimited offer going forward. If this does not occur, it's possible that new participants may be barred from obtaining coverage.
Selecting a large firm doesn't always mean it is competent. It's almost always in your best interest to go with a firm with expertise in the supplemental disability coverage arena.
4. 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, if the company is paying for the coverage, carriers will issue guaranteed standard-issue coverage. But it is possible to go a step further and layer an additional product, commonly referred to as high-limit coverage, that will cover up to 60% of highly compensated employees' total compensation and will cover an income up to $2,000,000.
5. Unnecessarily subjecting your employee group to underwriting. 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 or lack of innovation.
Supplemental disability income protection has a strong appeal today, particularly with the unpredictability of the economy. Offering a well-designed supplemental plan avoids unnecessary pitfalls and can help create employee satisfaction.
Christopher R. Kristian is executive vice president and managing director of The Westport Group in Braintree, MA. He may be reached at 781.380.1017 or
