Managing Risk - Group vs. Individual

The challenges for successful partnerships with either disability or life insurance are:

  1. to meet the needs of very highly compensated individuals, thus requiring well above market benefit amounts, and
  2. to retain reasonable premium rate stability and premium cost.

Striking the proper balance of Individual vs. Group coverage

All Group insurance is experience rated. A high indemnity claim(s) will result in a spike in loss ratios and result in a rate increase at the next renewal and perhaps the following renewal. The experience, i.e. incidence of claim, is highly unpredictable for any group of insureds fewer than 5,000 lives over a time period of only three years, which is typically the longest rate guarantee period an underwriter will consider. Over 20 years, we have seen many firms hit periods of peak partner claims incidence followed by vastly better experience periods. Actuaries attempt to estimate probable results using “Monte Carlo” statistical modeling, but the bottom line is that claims incidence within a limited time period is unpredictable and a partner claim has 3-10 times the impact of an employee claim.

Further, even with reinsurance, few if any Group insurers are willing or able to place the amounts of maximum indemnity needed and required by highly compensated individuals.

Individual insurance is NOT experience rated thus offers rate stability without regard to specific firm claims experience, thus offering premium cost stability. Also, Individual insurance may be combined with Group insurance to achieve much higher combined limits to achieve the levels of coverage needed.

Finally, coverage must be medically guaranteed regardless of pre-existing health conditions to benefit all eligible members.

The process of proper planning is to achieve a balance between the types of coverage in order to transfer a portion of the risk to non-experience rated coverage while also medically guaranteeing access to such coverage.

Disability Insurance

Over the past decade during continued growth in average partner compensation the major driving force in changes to coverage has been to increase partnership benefit limits from $15,000 to $20,000 and now to $35,000 to $50,000 per month in benefit.

Even a $35,000 claim can result a claims reserve of $5,000,000 or more. Even the largest law firms in the U.S. cannot sustain such a claim without major rate increase(s) well above the averages enjoyed by most firms. Firms with maximum benefits as low as $25,000 insured exclusively by Group insurance have seen rates spike to as much as $2.10 per $100 of covered payroll for all LTD coverage, including that paid on behalf of employees. Annual renewal increases can be well in excess of $1,000,000.

The overwhelming response by the vast majority of AmLaw 200 firms has been to blend a combination of Group and Individual disability insurance to meet their objectives.

Life Insurance

The amount of life insurance required for a deceased partner’s family to continue in the lifestyle to which they are accustomed is typically a multiple of income. Net of liquid investment savings most attorneys’ families will require an amount of life insurance equal to 6-8 time annual income of those who take the time to truly think through their family’s liabilities, needs, and the lifestyle desired. This is only a rough estimate. The amount needed may even be higher based upon current lower interest investment yields. Early in their careers all attorneys tend to be vastly better spenders than savers. It typically requires less insurance to plan on retiring (paying off) debt, rather than attempting to provide sufficient invested funds to carry the debt.

The issues of achieving premium rate stability, total combined amounts of coverage desired, and medical guarantees are approximately the same as for disability insurance. The best designed plans combine group and individual coverage in appropriate proportions.

It makes absolute sense for partners to participate in at least the maximum amount of Group Term and Supplemental Group Term insurance provided to and/or available to the firms most highly compensated employees. For many firms, this may be an amount of approximately $1,000,000 of coverage, dependent upon total size of firm and therefore spread of risk.

In our opinion, any benefit amounts exceeding approximately $1,000,000 should be transferred to an individual non-experience rated pooled product such as Group Universal Life (GUL) or Group Variable Universal Life (GVUL). TBG West practices exclusively within our fields of niche expertise and does not provide these individual products, which should be purchased only through an equally experienced specialist broker.

The key reasons to purchase GUL/GVUL are:

  1. To insulate your experience rated group premium cost from spikes from high indemnity claims.
  2. To secure more medically guaranteed coverage than otherwise available.
  3. To provide permanently portable life coverage.
  4. Provide lower cost of insurance rates during post retirement years than available from group term.
  5. To provide partners tax sheltered options to either pre-fund lifetime permanent life insurance or accumulate tax sheltered cash value for other purposes.

Where GUL or GVUL is desired, TBG West will gladly recommend a broker specialist whom we have worked with in the past, or cooperate with a broker of our client’s choice.