The Inflated Price of Group High Max LTD Plans And What to Do About It

Dave is a group and reinsurance underwriting leader with a career spanning 40 years at industry-leading companies.

1. Between actuarial loads, formula pricing, and less discounting applied in underwriting, Group LTD plans with monthly maximums higher than $10,000 could be priced as much as 30% higher than plans with monthly maximums lower than $10,000.

2. Actuarial loads could include loads for:

   • Maximums above $10,000 Higher salaries for key executives

   • Geographic loads for metropolitan areas where many companies that need higher limits are located

   • Richness of benefits

3. Many group insurance companies contract with reinsurers to transfer the risk of higher maximum plans. The cost of this reinsurance is usually passed along to the plan holder.

4. Group underwriters are often given the flexibility to discount formula rates, as much as 30% or more, to offer more competitive pricing. Most underwriters are more conservative in discounting high maximum plans.

5. Insurers frequently charge these higher prices to the whole group, but often, it is only a small group of key executives who need coverage above $10,000 per month.

David is a founding partner and President at The RBCGroup and has a 30-year career in sales and leadership roles with several industry-leading companies.

The RBCGroup provides consulting services such as sales performance strategies, value proposition development, sales and leadership development, compensation plan development services, and overall thought leadership strategy.

Example of Pricing on a High Max LTD Plan:

Group LTD Plan design:

• 60% income replacement to monthly maximum of $15,000

• 700 employees

• 40 key executives (out of the 700 total employees) earning more than $300,000 annually

Assume the LTD rate, if the monthly maximum was $10,000, would be $0.32 per $100 covered payroll:

• Load for maximum being greater than $10,000: +8%

• Load for covered pay on high-salary employees exceeding minimum threshold: +3%

• Reinsurance cost: +5%

• Lesser discounting applied by underwriter – Because of the high max, the plan is viewed higher risk than most cases on that underwriter’s desk, so the underwriter will likely apply far less discounting than lower max plans: +15%

Total extra cost due to high max: +31%

The $0.32 rate for a $10,000 monthly maximum plan would adjust to $0.42 for a $15,000 monthly maximum. The additional rate would be charged to the covered payroll for all 700 employees even though only 40 higher-paid employees qualified for more than $10,000 per month.

The above is for illustrative purposes only. The numbers and percentages are not based on actual loads being charged by any specific carrier, but are being used to show approximate pricing that many carriers could apply in cases like this.

Even Higher Rates at Renewal

The above illustration shows potential impact to pricing when a case is sold. The rates on these high max LTD plans usually go up even more at renewal, compared to lower max LTD plans.

Most group LTD underwriters are given a rate increase target each quarter (or year) that management expects them to hit.

For example, if an underwriter has a block of 30 cases, he or she may have a target to achieve a 5% increase on that block in a given renewal cycle. The underwriter usually has the flexibility to apply more or less than that 5% to cases based on the experience, plan design, and other risk factors unique to the group.

If 28 of the 30 groups being reviewed by that underwriter have a monthly maximum of $10,000 or lower, it is safe to assume the two with high monthly maximums will get a higher rate increase than the other 28, and potentially a higher increase than the 5% target.

Underwriters will often work with sales and account management to try to retain LTD plans that are profitable or have lower maximums. LTD plans with higher maximums and richer benefits are often not only given higher rate increases, but underwriters may want to lose those cases to the competition. In these situations, an underwriter will be less willing to negotiate a higher rate increase, forcing the broker or consultant to market the case to other carriers.

The Fix: Supplemental Coverage

The best way to fix the problem is to provide supplemental individual disability coverage to key employees.

Designed correctly, a combination of group and individual disability insurance will result in better coverage for key executives and much lower group plan costs.

These individual disability plans are structured to provide very high levels of income replacement for key employees. The plans are portable, and premiums are guaranteed not to increase. Most programs can be structured so key executives will not have to satisfy medical underwriting or take time to answer a bunch of medical questions.

These features can make it simple for Benefit Managers and busy executives to put supplemental plans into place.

For more information, please contact us

• Keith Johnson

• (913) 951-5400

• keith@theinsurancepartners.com