Income Protection for Law Firms

 In Law Firms

Competition in the legal recruiting field is at an all time high. As a law firm administrator or managing director, you know how important it is to not only attract, but to retain the most important lifeblood of your organization: your lawyers. One of the most overlooked items in benefits packages that we see is proper income protection for your firm’s highly compensated lawyers.

The risks of being disabled are staggering:

  • Your lawyers are three times more likely to become disabled than they are are to die before the age of 65
  • One in three working Americans will become disabled for 90 days or more before the age of 65
  • Average individual claims last longer than 30 months
  • Medical problems contributed to 62% of all personal bankruptcies filed in the United States

Your firm’s future income earning potential is one of their most valuable assets. If one of your lawyers earns $200,000 per year and is 45 years old, the loss of their income could result in a financial loss of over $6 million (assuming they work to age 67 and have 3% annual income increases) to their family.

The sad truth is that most lawyers do not have adequate income protection. Many Americans walk around without any disability coverage at all, leaving their incomes completely exposed. Even those who are fortunate enough to have group coverage through their firms are often underinsured.

Your law firm has a group long-term disability program? Excellent news. However, the reality is that a significant portion of your staff’s income income may still be at risk.

Group Income Protection

Many group income protection policies are inadequate. They have the following gaps and limitations:

  • Salary-Only Protection: Most Group Long Term Disability (GLTD) programs protect up to 60% of salary, with no income protection for other compensation such as bonuses, commissions, incentive plans and retirement savings.
  • Benefit Caps: GLTD programs typically have benefit caps based on more moderate income levels (often times $10,000 or $20,000 a month), which may limit the amount of income replacement more highly compensated employees can receive.
  • Taxes: Benefits from an Employer Paid Plan, like the usual GLTD program plan design, are taxable, so the actual income replacement may be significantly lower than expected.
  • Portability: GLTD programs may offer a convertibility feature (although rare) and don’t offer any portability benefits.

The solution for these issues is typically an Executive Disability program or a Supplemental Individual Disability Insurance (IDI) program. Providing supplemental IDI or the opportunity to purchase supplemental IDI at a group discounted rate is a valuable and key benefit to attract and retain top legal talent to your firm.

As the employer, you can pay the premium for your eligible employees or offer supplemental IDI as a voluntary benefit (or the opportunity to “buy up”) at a reduced group rate. If the employer pays the premium for the supplemental IDI, the benefits are considered taxable income, significantly reducing the income benefit. If the employee pays the premium, “buying up” or in the form of a voluntary benefit, the benefits are not taxable.

By supplementing your group plan’s LTD, you can offer your highly compensated partners an extra layer of protection that provides greater income replacement. This integrated coverage is a good solution because it provides a group LTD plan for all employees at a reasonable cost, as well as supplemental disability insurance that offers any eligible employee permanent individual coverage with some value-added features not typically found in LTD plans. This feature also benefits those of the rank and file class. Rank and file employees may be able to purchase an additional 10 to 20% of income replacement with very little medical and financial underwriting giving them the ability to have portable benefits.

Advantages

In addition to protecting your employees’ total compensation and closing income replacement gaps, other benefits of supplemental IDI typically include:

  • Option for up to 100% income replacement coverage for catastrophic disabilities
  • Custom designs that complement most group LTD plans
  • Fixed employer-sponsored discounted premium (up to 35 percent) and non-cancellable coverage to age 67
  • Individually owned permanent disability coverage

As the employer, you may find multiple advantages and efficiencies from offering supplemental IDI, such as:

  • It helps attract and retain top talent
  • It enhances the competitiveness of your benefits package without directly increasing your costs
  • It may stabilize overall rates
  • Claims experienced for supplemental IDI do not impact basic LTD rates

Benefits to your lawyers and staff include:

  • Security of a higher net income during a disability
  • Portable coverage, even if the employee changes jobs
  • Discounted, fixed premiums
  • No medical exams or lab work required
  • Easy payroll deduction (not mandatory)

The value of integrating group LTD and supplemental IDI is clear. It’s a long-term benefits solution that can stabilize group LTD plans, limit risk and volatility, and offer high-income earners the income replacement and enhanced coverage that better matches their needs.

Don’t leave their financial future to chance. We are well positioned to review your firm’s current income protection plan and help you develop a plan that works for the organization, it’s lawyers and staff. Please reach out to Chris Cahill with any questions at: Chris@TwelvePointsWealth.com or 978-318-9504.

Chris Cahill, J.D., CFP®, CAP®
Chris is a Partner and Principal of the Twelve Points Family Office Division. He specializes in financial planning strategies, estate planning, portfolio management, business succession and intergenerational wealth transfer to help clients achieve long-term financial objectives. Chris has over 15 years of experience working in a consultative capacity with some of the country's largest and most prestigious law firms, accounting firms and wealth management firms. He is a CERTIFIED FINANCIAL PLANNER® and holds a Series 66 securities license and is licensed to sell Life Insurance. Connect with him at 978-318-9504 or by clicking on the email link below.
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