LTD Insurance Programs for Law Firms
New Developments In Long Term Disability Insurance Programs for Law Firms
Higher Disability Benefits to Protect Partners’ Life Styles
Many Partners still are being provided with disability insurance that does not come close
to replacing their after tax income when they become disabled. Running such a risk is no longer necessary as disability benefit levels of up to $200,000 a month are now being issued to Partners. This is the result of favorable claims experience with law firms and the ability to go to overseas markets for excess coverage. These developments present a real opportunity for many firms to increase benefit levels or to lay-off risk from uninsured disability arrangements.
#2: A New Plan to Protect Your Wealth Accumulation Programs
When Partners become disabled, contributions to their 401k, profit sharing and partner pension plan stop. As a result they can face a catastrophic loss of benefits at age 65 – the very point in time when their disability insurance benefits usually stop. For example:
$70,000 Annual Retirement Plan Contribution*
Age Disabled |
Loss at Age 65 @ 7% |
40 |
$4,737,000 |
45 |
$3,070,000 |
50 |
$1,882,000 |
55 |
$1,034,000 |
60 |
$ 430,000 |
*To 401k, profit sharing and partner pension plans
The solution to this problem is Retirement Completion Insurance. This Plan allows Partners – or their Partnerships- to purchase disability insurance in addition to any disability contracts they now own. The Plan can be structured with the equivalent of tax-deductible premiums and annual benefits of up to $200,000 a year can be acquired.
#3:Stabilizing Group LTD Costs
It takes only a few large claims in any one firm to create a significant rate increase. To better understand why this can occur let’s look at the LTD risk pyramid:
At the bottom of the pyramid there is little risk for the insurance company; benefits are modest and to a great extent are offset by “other source” income such as Social Security. In addition the law of “large numbers applies” – a low risk is spread across a high percentage of the covered group.
At the top of the pyramid there is high risk for the insurance company; benefits are large, they are not offset by “other source” income, and the law of “small numbers” applies – a high risk is spread across a small percentage of the covered group.
The result is that a small number of claims from Partners can lead to a meaningful rate increase. For example: the reserve requirement for a 40 year old employee with a $1,500 a month total and permanent disability claim can be next to nothing but the reserve cost on a $30,000 a month benefit is about $4,000,000. Therefore LTD plans that provide large benefits to partners are subject to a high degree of rate volatility.
Reducing Rate Volatility By Using Different Risk Pools
The rate volatility problem can be solved by using a new LTD program, which has been implemented by many of the largest law firms in the country. The essence of this new program is to, in effect, “reinsure” a portion of higher paid disability benefits. This can be accomplished by laying-off about 30% of the LTD benefit to a pooled arrangement with long term rate guarantees.
The result, in many cases, is that the total cost for the new plan will be comparable to that of the existing program. The advantage to the firm is a substantial reduction in the amounts of LTD benefits that can be subject to rate increases.
#4: Converting the cost of Long Term Care Insurance to Interest
Long Term Care Insurance (LTCI) is simply a form of disability insurance and more and more firms are making it available to their Partners and employees. LTCI is a very effective Wealth Protection instrument but premiums – which can be significant- can be “lost” if the insured Partner never qualifies for benefits. Now some leading carriers are addressing the issue by introducing a premium refund feature.
Here is how it works: The insurance carrier will guarantee that when the insured dies, 100% of his or her premiums – less any benefits received- will be refunded to the beneficiaries. This feature converts the premium cost to interest – the interest that could have been earned on the premiums had they been invested.
If you would like further information on these new developments call me at 203-792-7300 or email me at ptd@corpcompinc.com.
Cordially,
Philip Davis
Philip T. Davis
Senior Partner
