An Overview of Key Findings for Individuals Employer Perspectives on Disability Benefits A study made possible by The American College and MassMutual
Contents 1 Disability benefits: flexibility to meet a variety of employee situations 2 Overview of findings: The base plan 4 Wider gap for executives 5 Buy-up coverage 6 Supplemental individual coverage 7 Plan loyalty and importance 7 Summary 7 Research methodology
Disability benefits: flexibility to meet a variety of employee situations For those who suddenly find themselves out of the workforce due to illness or injury, the resulting loss of income can be devastating. For this reason, one of the most valuable employee benefits is disability coverage, which pays employees a certain percentage of their income while they are unable to work. The concept of providing for those who cannot provide for themselves dates to at least the Babylonian Code of Hammurabi, nearly 4,000 years ago. Ancient Egyptians, Greeks, Romans, Muslims, and many other cultures up to modern times, have made provisions to provide for the sick and injured within their communities. In the United States today, disability benefits may come from a variety of sources, such as the federal government (social security disability benefits), the state (worker s compensation), the Veteran s Administration, an employee group plan, an individual disability insurance policy or a combination of those sources. The American College and MassMutual commissioned the study, Employer Perspectives on Disability Benefits, in order to better understand what employers are offering in disability coverage and to identify potential shortfalls and gaps in these offerings. The study was conducted by the Boston Research Group, a leading strategic market research and consulting firm specializing in the financial services industry. Benefit managers, or those most familiar with their company s group long term disability plan, were interviewed by telephone. From a list of the 3,000 largest companies, 316 interviews were completed. The charts in this booklet present findings from the largest companies to the smallest companies, as measured by their sales revenue. Additional information on the study methodology appears on page 7. This key findings overview highlights the responses of the companies interviewed for this study. It features a variety of plan designs and assesses overall plan satisfaction among employers in the workplace. Group long-term disability insurance can be a great help when paychecks stop, but it usually pays out less than an employee s pre-disability income, thus providing an incentive for going back to work. Unfortunately, while overall income goes down, monthly living expenses might actually go up, due to medical costs, for example. Individual disability income insurance can provide benefits to supplement the group plan benefits. For some, this supplemental amount could mean the difference between struggling financially or continuing to provide for oneself and one s family. 1
Overview of findings: The base plan A difference in value 71% of benefit managers say their group long term disability plan plays an important role in their company s benefit offering. Yet, only 51% felt their employees viewed disability coverage as extremely or very important. Nearly 90 percent of employees are eligible for group long term disability coverage. Most companies purchase this coverage from an insurance carrier and most provide it at no cost to their employees. The benefit period is typically until age 65 or Social Security Normal Retirement Age. In cases where the employees pay some or all of the premiums themselves, half may opt to pay the premiums or have the premium value included in their taxable income. Most opt to pay with their post-tax dollars, which means the benefits are not taxable. Group disability plans can take a variety of forms. Plans typically have a waiting period before benefits kick in, usually between three to six months. (Larger firms tend to have longer waiting periods.) Some plans define disability as the inability to perform one s regular occupation; and other plans define it as the inability to perform any occupation for which one is qualified by reason of education, training or experience. More than half use a dual definition of disability, with the definition changing from regular occupation to any occupation after 24 months. This could prompt employees who are ultimately unable to resume their former jobs to find other occupations. Base plan at a glance 60% (mean) of employees base salary covered by group plan 27% of base plans include variable compensation 68% of employees pay none of the premium for the plan 61% of companies offer a maximum monthly benefit of $10,000 or more 61% of plans have a waiting period of more than 90 days 62% have benefit period to age 65 63% have dual definition of disability 30% have special class of coverage for high earners/executives/owners 50% have options for employees to pay premium or have premium included in taxable income* * Based on employees who pay at least some of their premium Source: The American College and MassMutual s study on Employer Perspectives on Disability Benefits (2010) 2
0 20 40 60 80 100 Maximum benefit amount $10,000+ at 61% of companies Larger companies tend to provide a higher maximum benefit amount. Maximum monthly benefit amount for base plan N<$5K N $5K to < $10K N $10K to < $15K N $15K to < $20K N $20K+ Total 12% 27% 33% 16% 12% Largest Top 500 7% 16% 23% 22% 32% 501 to 1,000 4% 22% 40% 22% 12% 1,001 to 2,000 11% 32% 32% 18% 7% Smallest 2,001 to 3,000 20% 31% 35% 8% 6% Q1.7a: What is the maximum benefit amount per month of your base group long-term disability plan? Source: The American College and MassMutual s study on Employer Perspectives on Disability Benefits (2010) The typical benefit amount of a group disability plan is less than the employee s salary 60 percent on average. In most cases, the benefit is taxable further reducing the amount an employee would receive. Additionally, while 61 percent of firms have $10,000 or more as a maximum monthly benefit amount, only 28 percent offer $15,000 or more as a maximum benefit. The majority of respondents thought that this coverage was adequate, and indicated that most employees don t earn more than the covered limit, so the benefit cap is not an issue for them. A few, however, felt that the benefits would likely not cover most employees living expenses, especially those of highly compensated employees. Less than a third of the companies surveyed offer a special class of coverage for their highest earners. 3
Wider gap for executives Only 27% of base plans cover variable compensation, such as bonus and commissions. One problem, particularly for high earners, is that variable compensation (such as bonuses) in most cases is not covered. If an employee is typically rewarded with a generous bonus, then it is unlikely that a benefit equal to 60 percent of his or her base salary, received after a waiting period of several months, would make up for lost earnings. 0 20 Opportunities for enhanced coverage Some companies make more disability coverage available to employees. The study shows that 36 percent of employers offer the opportunity for employees to buy or apply for additional coverage, either through the 40 60 80 group plan or supplemental individual coverage. 100 One-third of companies make additional coverage available Offer Group Buy-up and/or Supplemental Individual Coverage N Yes N No Total 36% 64% Largest Top 500 37% 63% 501 to 1,000 37% 63% 1,001 to 2,000 39% 61% Smallest 2,001 to 3,000 33% 67% Q2.3: Do you offer buy-up coverage that is available through the group long-term disability program to all employees, some employees or to none of your employees? This does not include any supplemental individual long-term disability plans that you may offer. Q3.1: Do you offer an individual disability income program to supplement the group plan? This is different than any buy-up coverage that you offer with your group plan. Source: The American College and MassMutual s study on Employer Perspectives on Disability Benefits (2010) 4
Buy-up coverage maximum monthly benefit is $15,000 or more with base and buy-up coverage. For employees of most companies, the somewhat limited Although buy-up coverage might help reduce the gap base plan is the only option. However, a few companies offer between base benefits and lost earnings for most employees, buy-up coverage, paid for by the employee, usually with high earners could find themselves under-insured even after-tax dollars. Not surprisingly, the plans with the smallest with this extra protection. Nevertheless, few company monthly benefit base tend to offer the largest buy-ups. For representatives expressed concern. About half had never had almost half of companies offering buy-up coverage, the a discussion with their benefit providers about these limitations and only about half of that number plan to do so. 0 20 40 60 80 100 120 25% offer employees Buy-up Coverage within Group Plan The largest companies are somewhat more likely to offer buy-up coverage compared to smaller firms. Do you offer Buy-Up Coverage Available through GLTD Program? N Yes, to all employees N Yes, to select employees N Not offered Total 19% 5% 75% Largest Top 500 27% 3% 70% 501 to 1,000 27% 2% 71% 1,001 to 2,000 16% 8% 77% Smallest 2,001 to 3,000 16% 6% 78% Q2.3: Do you offer buy-up coverage that is available through the group long-term disability program to all employees, some employees or to none of your employees? This does not include any supplemental individual long-term disability plans that you may offer. Source: The American College and MassMutual s study on Employer Perspectives on Disability Benefits (2010) 5
Supplemental individual coverage An attractive option for employees desiring to reduce the Supplemental individual coverage offers the opportunity to gap would be individual disability income insurance coverage to supplement the group plan. Most companies, however, to help meet his or her unique needs. In the event of a serious customize a long-term disability solution for an individual expressed resistance formed from two misconceptions: injury or a long-term illness, expenses such as mortgages, taking on additional administrative burden and the perceived utilities, car payments, repairs, tuition, and food continue, extra costs of offering such an option, even though a majority while costs for uncompensated medical bills and equipment of employees pay 100 percent of these premiums themselves. can mount. Individual disability income insurance can offer Those that do offer individual coverage offer it to only about peace of mind by providing a way for someone who cannot 0 20 40 60 80 100 half of their employees, basing eligibility on such factors as work to help meet expenses. job title, compensation and executive carve-out. 15% of companies offer Individual Coverage and 1 in 5 have recently implemented the offer Offer Supplemental Individual Disability Income Insurance N Yes N No Total 15% 85% Largest Top 500 13% 87% 501 to 1,000 14% 86% 1,001 to 2,000 17% 83% Smallest 2,001 to 3,000 13% 87% When was Supplemental Plan implemented? Base: Offer Supplemental Disability Income Insurance N <3 years ago N 3 to <5 years ago N 5 to < 10 years ago N 10 + years ago Total 20% 18% 23% 39% Q3.1: Do you offer an individual disability income program to supplement the group plan? This is different than any buy-up coverage that you offer with your group plan. Q3.3a: In what year was the supplemental disability income program implemented? Source: The American College and MassMutual s study on Employer Perspectives on Disability Benefits (2010) 6
Plan loyalty and importance Generally speaking, benefits managers regard their group long-term disability plan as an important part of their company s benefit package. However, they feel that employees don t necessarily feel as strongly. Insurance is an intangible product that can t be seen, felt or tasted. Experienced benefits managers are more likely to have observed real-life cases of disability claims and understand the difference insurance can make to an individual and his or her family. Employees who believe it can t happen to me likely have not been impacted by a change in health or the health of a loved one as a result of an injury or illness. Although more than half of the companies surveyed evaluate their group plans annually, only a quarter are considering making changes to their program in the future. Smaller companies are more likely to have shopped their base plan through a request for proposal (RFP) within the last year. Though most are satisfied with their provider s products and services, a few are trying to obtain better pricing, different offerings, or better customer service. Summary What makes a good group long-term disability plan? It depends on many things, such as a company s size or its culture. The study indicates that many benefit managers felt employees may not value disability coverage as highly as they themselves do. Disability coverage offers a combination of many options to help protect an employee s ability to earn an income. Plan decisions are best considered carefully and re-evaluated frequently. Research methodology A phone-based data collection methodology was used to meet the study objectives. The sample frame for the study consisted of the 3,000 largest firms in the United States based on sales revenue. The sample list was purchased from Dun & Bradstreet and was augmented using the 401kExchange and Hoovers.com databases to append contact information. A 16-minute computer assisted telephone interview was conducted with the person who is most familiar with the firm s long-term disability plan. Interviews were conducted between July 26th and September 24th, 2010. Approximately 80 percent of the interviews were completed with a benefits or human resources director or manager. To correct for the size stratification above, the data was weighted to accurately reflect the number of firms represented by each of the size segments. About the companies surveyed Firm size Number of completed interviews Median sales revenue* Median number of employees* Top 500 60 $11.3 billion 29,000 501 to 1,000 52 $2.7 billion 6,700 1,001 to 2,000 103 $1.2 billion 3,900 2,001 to 3,000 101 $562 million 2,300 Total 316 Source: The American College and MassMutual s study on Employer Perspectives on Disability Benefits (2010) * Based on sample information 7
About The American College The American College is a non-profit educational institution with the highest level of academic accreditation dedicated to leadership in innovative training and development for financial services professionals. The College is distinguished by resources of the highest quality, innovation in program delivery and design, and results that create sustainable advantages for our customers. Serving as a valued business partner to banks, brokerage firms, insurance companies and others for over 83 years, The American College has assembled a faculty of the foremost thought leaders in the industry to help companies and their employees succeed. www.theamericancollege.edu About Boston Research Group Boston Research Group (BRG) is a strategic market research and consulting firm that specializes in the financial services and employee benefits industries. BRG conducts projects that deal with both strategic and tactical marketing issues, including loyalty and satisfaction, market segmentation, brand assessment, product development, sales processes, and distribution strategies. BRG s work focuses on applying market research information, collected and analyzed using qualitative and quantitative data collection techniques and methodologies, to provide solutions for marketing-related challenges. About MassMutual Founded in 1851, MassMutual is a leading mutual life insurance company that is run for the benefit of its members and participating policyholders. The company has a long history of financial strength and strong performance, and although dividends are not guaranteed, MassMutual has paid dividends to eligible participating policyholders every year since the 1860s. With whole life insurance as its foundation, MassMutual provides products to help meet the financial needs of clients, such as life insurance, disability income insurance, long term care insurance, retirement/401(k) plan services, and annuities. In addition, the company s strong and growing network of financial professionals helps clients make good financial decisions for the long-term. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives. MassMutual is headquartered in Springfield, Massachusetts and its major affiliates include: Babson Capital Management LLC; Baring Asset Management Limited; Cornerstone Real Estate Advisers LLC; The First Mercantile Trust Company; MassMutual International LLC; MML Investors Services, LLC, member FINRA and SIPC; OppenheimerFunds, Inc.; and The MassMutual Trust Company, fsb. www.massmutual.com www.bostonresearch.com 8
We care about our employees so we will look at supplemental programs and how they will positively impact employees. Executive Director, Human Resources If they re getting 60% of their base salary, after taxes they re probably getting 40%, so they re really not getting an adequate replacement ratio. Manager of global benefits It s hard for people to live on 60% of their salary. Senior Director of Human Resources at a transportation Company At only 60% of salary, I would have a hard time paying my bills. It s my personal thought. Benefits Manager at a university We have people that just wouldn t benefit by that amount. They d be left short. Benefits Manager at a major furniture manufacturer For more information about this study, please visit MassMutual.com or TheAmericanCollege.edu 9
The information provided is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Disability income insurance policies are issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111. Policies have exclusions and limitations. For costs and complete details of coverage, call your agent or MassMutual at 1-800-272-2216 for referral to an agent. 2011 Massachusetts Mutual Life Insurance Company, Springfield, MA. All rights reserved. www.massmutual.com. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives. DI10069 311 CRN201302-144648