How a Group Disability Benefit Is Calculated
You probably know the percentage. It appears on the benefits summary and it is usually 60%.
The number the percentage is applied to gets far less attention, and that is the number that changes from one contract to the next. It appears in the definitions section rather than the schedule of benefits, under a term such as covered earnings, insured earnings, predisability earnings or monthly earnings, depending on the insurer.
Across the contracts examined for this report, which did not come from financial services employers but were nonetheless underwritten by the same carriers, three broad themes appear.
The majority define the term as base salary and then exclude incentive pay, bonuses, commissions and overtime, and in some cases stock compensation. A smaller number reach a broader figure, closer to total cash compensation as reported for tax purposes. And in at least one case the insurer states no default at all, leaving the definition to be completed by the employer.
That variation deserves consideration because it decides what a benefit is worth. On a base-salary definition, a plan replacing 60% turns $600,000 of total compensation into $180,000 of pre-tax coverage. On a definition built from total cash compensation, the same plan at the same percentage pays $360,000. Same percentage, same employee, a difference of $180,000 a year, which is why the definition of “covered earnings” is so important.
The best-hedged desk on the Street rarely covers the trader’s own paycheck. That exposure is the trader’s to hedge, and no one else’s.
Covered earnings is a choice, not a default.
The insurer drafts the language and prices the variants. The employer selects one. That is why two employers insured by the same company can offer materially different coverage, and why the answer cannot be read off the insurer’s name or off what a colleague at another firm was told.
It also means the base-salary definition is a choice rather than a constraint. Broader definitions exist, are written by mainstream insurers, and are in force at large employers today.
Own-occupation coverage is usually time-limited
Own-occupation coverage, which is intended to pay when you cannot perform your own job rather than any job, is the provision most high earners assume they have, but it’s not permanent.
In every contract examined for this guide that specifies a duration, it converts, usually after 24 months, to a test of whether the claimant can perform any occupation they are reasonably suited for.
The test that replaces it is measured against the same covered-earnings figure. So a professional insured on base salary can be found capable of a job paying a fraction of their former total compensation, and the payments stop.
You probably know the percentage. It appears on the benefits summary and it is usually 60%.
The number the percentage is applied to gets far less attention, and that is the number that changes from one contract to the next. It appears in the definitions section rather than the schedule of benefits, under a term such as covered earnings, insured earnings, predisability earnings or monthly earnings, depending on the insurer.
Across the contracts examined for this report, which did not come from financial services employers but were nonetheless underwritten by the same carriers, three broad themes appear.
The majority define the term as base salary and then exclude incentive pay, bonuses, commissions and overtime, and in some cases stock compensation. A smaller number reach a broader figure, closer to total cash compensation as reported for tax purposes. And in at least one case the insurer states no default at all, leaving the definition to be completed by the employer.
That variation deserves consideration because it decides what a benefit is worth. On a base-salary definition, a plan replacing 60% turns $600,000 of total compensation into $180,000 of pre-tax coverage. On a definition built from total cash compensation, the same plan at the same percentage pays $360,000. Same percentage, same employee, a difference of $180,000 a year, which is why the definition of “covered earnings” is so important.
The best-hedged desk on the Street rarely covers the trader’s own paycheck. That exposure is the trader’s to hedge, and no one else’s.
Covered earnings is a choice, not a default.
The insurer drafts the language and prices the variants. The employer selects one. That is why two employers insured by the same company can offer materially different coverage, and why the answer cannot be read off the insurer’s name or off what a colleague at another firm was told.
It also means the base-salary definition is a choice rather than a constraint. Broader definitions exist, are written by mainstream insurers, and are in force at large employers today.
Own-occupation coverage is usually time-limited
Own-occupation coverage, which is intended to pay when you cannot perform your own job rather than any job, is the provision most high earners assume they have, but it’s not permanent.
In every contract examined for this guide that specifies a duration, it converts, usually after 24 months, to a test of whether the claimant can perform any occupation they are reasonably suited for.
The test that replaces it is measured against the same covered-earnings figure. So a professional insured on base salary can be found capable of a job paying a fraction of their former total compensation, and the payments stop.