The 40/20 Plan
Using the 40/20 plan to stabilize group long term disability insurance rates
Group long term disability insurance was originally designed to underwrite relatively small amounts of insurance over a base of a large number of employees. This risk model insures that adverse claims experience will have little, if any, impact on premium rates.
However, many law firms now provide group LTD benefits to their Partners of up to $70,000 a month. This means that a high percentage of the total LTD risk is owned by a relatively small percentage of the firm’s participants. In addition the Social Security disability benefit offsets a high percentage low monthly benefits but only a small percentage of high monthly benefits. For example, SSDI offsets about 35% of a $5,000 benefit but only about 5% of a $35,000 benefit.
The combination of these factors almost guarantees a rate increase if a “bad” run of claims is incurred by higher paid participants. – For example, the reserve necessary to fund a $70,000 monthly disability claim on a 40-year-old Partner can easily exceed $6,000,000.
To solve this problem CCP has developed a risk transfer program to minimize the rate volatility inherent in high-benefit disability plans. This is accomplished by transferring 1/3 of the long-term disability insurance risk into an individual policy guaranteed premium pool (40% of compensation is insured by the group contract and 20% by individual policies). Claims experience from the individual policy component cannot affect the premium structure of this pool because the rates are guaranteed to age 65. Equally important, the insurance carrier cannot cancel individual policies nor modify their benefits.
In addition, 40/20 type plans can usually be implemented without an increase in the current total group insurance costs. There are three reasons for this cost neutral result: (1) The unit cost of the remaining group insurance left in force is materially reduced because the risk charges applied against high dollar benefits can be eliminated (2) the Social Security offset becomes a much higher percentage of the total benefit and (3) the individual policy premium rates are highly discounted.
Another advantage of the 40/20 plans is that the insurance in the guaranteed pool can be made portable at the age of issue premium rate and without any reductions in benefits. This feature enables Partners to continue a sizeable portion of their protection in force on a favorable basis if they leave their firm.
We utilize a sophisticated software program to compute the optimum percentage of coverage to be shifted to the guaranteed risk pool. In addition, the program enables us to effectively administer the integrated 40/20 LTD plan design on an ongoing basis so as to minimize human resource work and involvement.
If you would like to receive a detailed memorandum on these concepts call Philip Davis at 203.792.7300 or email him at ptdavis@corpcompinc.com.
