Guardian: The Only CBA Approved True Own-Occupation Plan for Attorneys

In the October 2000 issue of The Colorado Lawyer, I read an interesting article on Employment Benefits provided by law firms for their employees in Colorado. The article stated that a 1999 survey of 100 Denver area law firms showed that 77% of the firms offered Long-term disability insurance to their attorney-employees as a fringe benefit. I was a bit surprised to see the participation in a strictly voluntary type of insurance coverage to be so high. This high percentage of participation in such insurance programs shows, in my opinion, that the Colorado community of attorneys recognizes the importance of such coverage in basic financial planning – particularly in a specialized occupation like the practice of law.

The odds of suffering a long-term disability before age 50 are relatively high for the general population - about 30% for men and 40% for women, and can be even higher for an attorney because of the specialized nature of the occupation. Most people don’t know that at ages before 60, the odds of suffering a disability are far greater than for death.

Group disability insurance policies are valuable for the protection they provide, and are attractive to employees because their cost is usually low, or even free to the employee. Rates for such coverage are generally lower than for individual disability coverage because several employees (the group) are buying coverage together, and rates are not guaranteed by contract. Also, medical underwriting is typically not required for participants in the plan – making the coverage even more attractive.

Although group plans are widely available, and often offered as a fringe benefit at the majority of Colorado’s larger law firms, it is important to know the limitations inherent in such policies in relation to individual disability insurance contracts. The rest of this article will deal with these differences.

One of the most important differences between group and individual disability contracts is the taxability of income benefits. Basically, the income benefit received by the employee is taxable to the extent that the employer paid the premium for the coverage. If the employer paid for 100% of the premium, then 100% of the benefit would be taxable.

Most group policies pay a total disability benefit of about 60% of the employees’ gross earnings up to a certain limit (cap), usually set at around $8,000 per month. For example, lets say an attorney making $150,000 per year became disabled, satisfied their waiting period, and began receiving benefits from the group policy of which their employer paid 100% of the premium. How much income would he/she receive? The calculation is simple: Take 60% of the monthly income ($12,500x .6) to get $7,500 per month. Now factor in the tax bracket of the employee – lets assume 34%. Multiply $7,500 by .34 to get $2,550 in taxes and subtract it from the $7,500 monthly benefit to arrive at $4,950 per month. The attorney in this example who is used to an after tax income of around $8,300 per month is now bringing home a little over half that amount. Ask yourself this question: Could you live on 60% of your current net income? The answer for most of us is a resounding NO!

Individual disability coverage benefits are not taxable because premiums are paid by the insured with after-tax dollars. There are other features of a properly structured individual product that are simply not available with group coverage. These include:

Although group disability contracts do not have the guarantees nor are they as comprehensive as individual contracts, they are still attractive to employees because of their guaranteed issuance and their affordability (often free to employees). The purpose of this article is not to discredit the value of group disability coverage, but rather to show people who participate in such plans that there is a more effective way to cover their income than with group coverage alone.

Carrying group disability coverage as a sole means of income protection can be dangerous because of the aforementioned limitations. There is however, a simple and affordable means to bridge the gap that group coverage leaves behind. Carrying a supplemental layer of individual coverage is the intelligent choice for true income protection. Using this method, the insured can receive benefits equal to 80% or more of their current net income in the event of a disabling accident or illness. Using the example above of the employee making $150,000 per year, the employee would purchase an additional $2300 per month in individual, tax-free coverage (this is the maximum additional coverage available from the insurance company per income and participation limits). This would give him/her a tax-free monthly benefit of $7,250 as opposed to the $4,950 that the group contract provides. This is equivalent to 87% of the insured’s current net income! Remember, in our example above, the group plan paid benefits equal to only 58% of the attorney’s net income because of income taxes. Carrying the supplemental individual coverage is the only way to protect you and your family adequately in the event of disability – especially those attorneys in higher tax brackets.

Carrying supplemental disability insurance is a strategy that I recommend for my clients with group coverage. All of the financial advisors that I know recommend this strategy for maximizing personal income protection in the event of disability as well. It is basic financial planning. The cost of the supplemental coverage is negligible in relation to the protection. Depending on your age and how you structure your plan, you’ll look to spend between .75% and 1% of your income in premiums for the coverage – a small price to pay for the peace of mind it provides. An adequate disability income plan is one of the basic pieces of a true financial plan. Think about it: how can you maintain your lifestyle and save for retirement if you can’t earn a living in the first place? You can’t. Make sure you have adequate coverage to protect your most valuable asset – your ability to work and earn a living as an attorney.