Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Combining group plans with individual can help firms manage risk
by Matt Krumrie No matter what an employer’s size, the main reason for offering benefit programs is the same — to attract and retain qualified employees. This reason carries special weight for small and mid-size employers.
“Relying on the skills of fewer people, small companies must find cost-effective ways to retain and attract employees or risk losing them to corporate employers offering richer benefit packages,” says Michael O’Brien, a representative of Unum Provident in Edina.
The financial impact of losing talent can be great for a small business. The Bureau of Labor Statistics estimates that the average person will hold 9.2 jobs from the age of 18 to 34, with a turnover cost estimated at $10,000 per employee.
O’Brien says strong group life and disability income-protection plans can be one way small-business owners separate themselves from competitors.
“Because small employers typically enjoy a closer relationship with their employees, they realize income-protection coverage can be an important way to help employees protect themselves and their families from the financial risk that can result from a serious disability,” says O’Brien.
It could be a weekend sports injury or even a minor car accident that keeps an employee home for several weeks. Health insurance may cover medical expenses, but disability income protection insurance can help pay the other bills — rent, mortgage, utilities and health insurance premiums — while an employee recovers and is unable to work.
“By providing this important coverage, small employers help their employees protect everything they work hard to provide,” says O’Brien. “Without it, the impact of an illness or injury on debt, savings and assets can be devastating.”
According to LIMRA International, an insurance and financial services research organization in Windsor, Connecticut:
• More than half of Americans say they don’t feel they have saved enough for the future — and close to a third live paycheck to paycheck.
• Nearly 60 percent of injuries happen off the job, which means they are not covered by worker’s compensation.
• An accident or illness will keep three out of every 10 workers between the ages of 25 and 65 out of work for three months or longer.
Studies show that many employers think the likelihood of an employee becoming disabled is one in 50. The actual likelihood is more like one in three.
According to LIMRA International virtually all employers with more than 100 employees offer life insurance plans, and a majority of those with between 10 and 99 employees do as well.
Extra needs for owners
Marv Augustin, an agent with Northwestern Mutual Life Insurance in New Ulm, says business owners should consider purchasing individual life and disability policies simply because most group policies don’t cover as well as an individual plan, and can be tailored to fit the business owners’ needs.
In addition, the business owners may have needs to purchase life insurance outside of their group benefits: They may need to fund a buy-sell agreement, or they may need additional key-person life insurance.
“They would receive the life insurance proceeds to help them through the difficult times,” says Augustin. “And, another advantage to purchasing individual life insurance over group life insurance, if the owner’s health is good, often times it is less expensive plus individual life and individual disability policies are portable.” That means if the owner leaves the company, the policy would go with him or her.
Rex Kohl, with Associated Financial Group in Minnetonka, agrees with Augustin, saying small-business owners need to understand that life and disability insurance needs of employees are going to differ based on compensation.
“Keep in mind the average plan will probably cover the needs of the average rank-and-file employee,” says Kohl. “It would be good to set up an individual plan for higher income employees, and the costs are not much different. It’s a good decision to take into account the benefit need and insurability of higher compensated individuals as you are designing group plans,” says Kohl.
Gaps in coverage
Disability coverage is another story, says O’Brien. LIMRA reports that fewer than half of employers with fewer than 100 employees offer disability income protection. Convincing small employers to add group income-protection insurance to their benefits portfolio can be difficult due to escalating medical costs and tight employee benefit budgets.
O’Brien says the policies are important, and newer, flexible payment options make them “more affordable than in the past, even for groups with 10 or fewer employees.”
Escalating medical costs are having a major impact on the decisions employers make about their overall benefit offerings. That’s not surprising, given that health care premiums have risen 72 percent over the last five years, according to LIMRA.
“With significant demands on benefit budgets, employers are facing tough choices, not only about what coverages to offer, but who will pay for them,” says O’Brien, who adds since almost all companies with more than 20 employees offer medical insurance, disability coverage faces the risk of being squeezed out so employers can pay for health benefits.
A recent LIMRA study shows that most employers don’t want to reduce the benefits they offer, and one-quarter of the companies surveyed said they plan to add benefits.
O’Brien says long term disability insurance represents 0.7 percent of an employer’s total benefit dollars. The cost per employee is only slightly higher than life insurance benefits and a fraction of the cost of medical premiums or even dental and prescription drug premiums, he says.
One option to consider: a growing selection of voluntary coverages on both group and individual plans allows employers to share costs in ways that weren’t available in the past. Employers save on overall expense and employees gain access to valuable coverage at discounted group rates.
All group disability plans, whether insured or self-funded, allow you to spread risk throughout the employee population to minimize plan costs, adds O’Brien. But there’s a downside: the risk, or volatility, of the plan is based on the total group experience.
So how can you ensure adequate income replacement for all employees — particularly those in the higher income bracket — while minimizing the volatility of plan experience and pricing?
Less price volatility
An integrated plan design capitalizing on the benefits of both group and individual policies may be the answer, says O’Brien. “It can enhance benefits, diversify risk and potentially reduce future costs for an employer,” he says.
He recommends combining a base long-term disability plan with an individual income protection plan. That enhances benefits for employees while building in a risk-sharing component, which in turns stabilizes the plan against future pricing volatility.
The group policy is subsequently less volatile and more predictable to price, adds O’Brien.
[contact] Marv Augustin, Northwestern Mutual Financial, New Ulm: 507.354.2226; ma***********@**fn.com; www.nmfn.com. Rex Kohl, Associated Financial Group: 952.945.0200, ext. 794; re******@**********************up.com ; www.associatedfinancialgroup.com. Michael O’Brien, Unum Provident: 952.346.4529;ma******@***********nt.com; www.unumprovident.com
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