You put a lot of work into finding the best executives to lead your company, and their high compensation reflects the value they drive for your business. But a high salary and other compensation, such as bonuses, aren’t always enough to win over key leaders. Your full benefits strategy makes a difference. That’s why executive disability insurance may be worth exploring: it can help address financial protection needs that reflect the amounts and ways executives earn income.
Key takeaways
Group long-term disability plans typically cap monthly benefits and calculate payouts on base salary alone, leaving high earners with a fraction of their true income protected.
Executive disability insurance is individually owned, portable coverage that layers on top of group LTD to protect bonuses, commissions, and higher compensation.
Because coverage is individually owned, an executive keeps it if they change employers, unlike coverage under a group plan tied to a single job.
Offering executive disability coverage is a talent-strategy lever that supports long-term retention, as employees who have a positive leave experience are 75% more likely to stay at their job for five-plus years.1
Guardian’s Multi Life Disability solution could simplify how businesses offer executive disability policies with Guaranteed Standard Issue underwriting, allowing eligible executives to enroll without medical exams or financial documentation.
What is executive disability insurance?
Executive disability insurance is a specialized type of individual disability income insurance designed for highly compensated employees whose total compensation exceeds what a group long-term disability (LTD) plan would replace.
In other words, executives typically earn too much to be sufficiently covered by a standard group disability insurance policy, so executive disability insurance policies supplement these plans to close coverage gaps. And while group LTD policies typically only cover employees during their tenure at that company, executive disability insurance policies are structured as individual, portable coverage.
Note, however, that executive disability insurance typically isn’t an off-the-shelf product that employers or executives buy the way they might for standard LTD. Instead, it’s usually a more customized form of supplemental income protection purchased through an insurance carrier or broker. Some employers directly purchase plans for their executives, while others provide bonuses meant to fund executives’ own purchases of these policies.
As such, executive disability insurance often acts as an executive recruitment and retention tool.
What executive disability insurance actually covers
Executive disability insurance can be structured in different ways, but these policies generally offer higher coverage limits than group LTD policies and span multiple compensation areas.
Base salary
Bonuses
Commissions
Equity compensation (if determined to be regular income source)
Two ways group LTD leaves high earners underinsured
Monthly benefit caps | Bonus/commission exclusions |
|---|---|
Group LTD plans typically have monthly benefit caps for individual payouts that create shortfalls for executives. Usually, group LTD replaces around 50%–60% of an employee’s salary, up to a monthly limit of around $10,000–$15,000. For someone earning $40,000 per month ($480,000 per year), that means standard disability insurance might cover as little as 25% of their regular income. | In addition to capping monthly benefits, group disability plans typically exclude bonuses, commissions, and other nonstandard pay when calculating coverage. Instead, coverage amounts are often determined by base salaries. Yet executives often only earn a portion of their total compensation through base salaries, which can mean their disability insurance benefits don’t match their total income. Suppose an executive earns $120,000 per year in base salary, $60,000 in annual bonuses, and $180,000 in equity compensation. Putting aside the variability of equity comp, this averages out to $30,000 in monthly compensation. But if a group LTD plan only pays 60% of base salaries, that executive would only receive $6,000 in monthly disability income benefits. |
The higher the income and the more variable the compensation, the greater the risk an executive faces of encountering both limitations and being underinsured.
How executive disability insurance goes beyond group coverage
Group LTD | Executive disability insurance | |
|---|---|---|
Benefit cap | Hard monthly cap, typically around $10,000–$15,000 | Varies but generally provides higher or supplemental limits to layer on top of group coverage, bringing the executive to around 60% of their total compensation |
Income basis | Base salary only | Often total compensation, including bonus, commission, and potentially equity compensation for those regularly vesting shares |
Portability | None; coverage generally ends when the employee leaves the company | Individually owned, so the policy can follow the executive regardless of employer (although responsibility for paying premiums may shift from employer to employee) |
Definition of disability | Often starts as “own occupation” but shifts to “any occupation” after a set period for continued claims, making it harder to qualify for benefits | Often stays as “own occupation” throughout the policy and claims period |
Offset by other coverage | Benefits are commonly reduced by Social Security Disability Insurance (SSDI), workers’ compensation, and other active income sources | Benefits are generally not reduced by other coverage such as group LTD, SSDI, or workers’ compensation |
Executive disability insurance is designed to go beyond group coverage, from offering higher maximum benefits to covering more of the ways executives earn income. That said, the two often work together for more comprehensive coverage.
Choosing the right definition of disability
Employers purchasing executive disability insurance — and group LTD for that matter — should pay close attention to different definitions of disability, which vary by policy. Why? Your employees’ ability to earn a living is likely their most valuable asset. High-earning professionals and workers with specialized skill sets need disability income insurance that can protect the income they earn from doing the things they do best.
Own-occupation disability: An own-occupation definition of disability means that claims will be paid if the beneficiary cannot work within the same occupation/profession that they had before the disability, even if they’re able to perform other types of work. For example, if a surgeon suffers a hand injury that affects their ability to perform surgery, that would generally be an own-occupation disability. They might still be able to earn a solid income moving into research or teaching, but if the occupation is considered different under the specific policy terms, they could still receive disability benefits.
Executive disability insurance policies often use this own-occupation definition, but there are variations with important nuances. That’s why Guardian offers multiple options for own-occupation disability. For example, modified own-occupation coverage pays a full benefit when an employee can’t work in their regular occupation and is not gainfully employed in another capacity. However, if they decide to start working in another capacity, for example, as a consultant, income benefits would stop.
Any-occupation disability: This broader term might sound like it provides more comprehensive disability protection, but it’s actually the opposite. Under an any-occupation definition of disability, claims will be paid only if the disability prevents the beneficiary from performing any type of work, not just their current profession. Group LTD policies often start with an own-occupation definition, then transition to any-occupation for long-term claims, such as after two years.
Residual/partial disability: Some disability insurance policies include partial disability riders, also called residual disability riders, that pay partial benefits if the beneficiary has an injury or illness that causes a reduction in income due to some work limitations, even if they’re still working. For example, an executive may experience a health condition that prevents them from flying and requires a lighter schedule. In that case, they might step down into a lower-paying, less-demanding role, and a residual/partial disability rider could help cover that income gap.
Portability
Executives want to be able to take their disability insurance policies with them throughout their careers, rather than being handcuffed by a policy that only applies to the current employer.
Non-cancellable terms
A good executive disability insurance policy should also ensure that as long as premiums are paid on time, then the policy is noncancelable by the carrier. Also, the rates and specific provisions of the policy should stay fixed until around age 65 or 67, so the executive has reliable protection until they reach retirement age.
Flexible own-occupation definitions
It’s hard to predict exactly how a disability would affect an executive’s ability to work again, as well as what they might want to try. So, flexible own-occupation definitions can help, such as if there’s freedom to receive full benefits if not working at all, or to receive partial benefits via riders to close any income gap if the executive tries to work part-time or take a lower-paying role.
Carrier strength
A solid insurance carrier behind the disability policy gives executives confidence that the insurer will be able to meet benefit obligations indefinitely. Guardian has strong financial ratings from independent credit rating agencies (e.g., an A++ Superior rating from A.M. Best) and over 165 years of meeting its benefit obligations.2
How disability fits your executive benefits strategy
Executive disability insurance is typically part of a larger executive benefits strategy that covers your leadership team’s physical, financial, and professional health.
While standard employee benefits like group LTD cover baseline needs, an executive-tier benefits package uses specialized, layered products to protect high earners and entice them to join or stay at your company. For example, in addition to Guardian’s MLDI plans providing executives with disability income protection, Guardian offers other specialized benefits, such as executive life insurance, that can help executives financially protect their families in line with their higher total compensation.
Some companies also offer supplemental executive retirement plans (SERPs), which enable executives to put more into retirement savings, given that standard IRS contribution limits for 401(k) plans are often too low to align with executives’ retirement income needs. Similarly, some companies offer specialized executive perks, such as financial counseling services, career coaching, and premium preventive health care, including executive physicals.To see how these types of individual components come together to form a top-tier executive talent management strategy, explore Guardian’s Executive Benefits hub.
Building a more competitive benefits strategy
For companies that want to do a better job attracting and retaining senior leadership through comprehensive benefits, offering an executive disability insurance policy can play an important role. These policies turn a benefits gap into a retention advantage by protecting executives’ higher, more varied incomes.
To get an insurance quote or simply discuss how a Multi-Life Disability Insurance solution can make your benefits strategy more competitive, connect with a Guardian financial advisor.
Top Questions About Executive Disability Benefits
Executive disability generally refers to a type of supplemental insurance that provides higher benefit amounts than group LTD and covers total compensation rather than just base salary. That enables executives to protect a greater share of their income in the event of a long-term disability, rather than facing lower limits that don’t align with their high pay.
Executive disability insurance typically covers an executive’s total compensation package, up to around 60% of total pay when combined with any group LTD benefits. This includes compensation such as base salaries, bonuses, commissions, and potentially equity compensation.
The three main types of disability insurance include short-term disability (generally covers one year or less), long-term disability (usually for disabilities lasting more than one year), and supplemental/individual disability insurance policies, like executive disability policies, which layer on top of group short-term or long-term disability plans to cover income gaps.
The four main categories of disabilities, for assessing benefit payouts, span duration (temporary versus permanent) and severity (partial versus total). So, there’s temporary partial disability, temporary total disability, permanent partial disability, and permanent total disability. These different categories affect areas like whether you can still work part-time and whether your benefits will be paid for a given period or until you reach the end of the policy term, such as at age 65 or 67 for retirement.
