Find gaps in group life and disability benefits. Review coverage caps, taxes and portability, and distinguish employee coverage from key-person insurance.
September 28, 2026 · Financial Forte Staff
Historical article: prepared retrospectively using information available as of September 28, 2026.
A group benefit described as “60% of pay” or “two times salary” may sound adequate until a higher-paid employee reaches the policy's dollar cap. The advertised percentage and the actual protection can be very different. A benefits review should identify that difference before an employee relies on the description during a difficult event.
Compare the actual contract limits with the needs the benefit is intended to address. Review covered compensation, offsets, premium taxation, portability and underwriting before considering supplemental coverage. Keep employee protection separate from insurance intended to protect the business from losing a key person.
Translate the group formula into actual dollars
Take a hypothetical executive earning $200,000 a year. The employer's long-term disability policy describes a benefit equal to 60% of covered monthly salary, capped at $6,000 a month. Assume the full salary is covered compensation and no other offset applies in this initial example.
Monthly salary is about $16,667. Sixty percent would be $10,000, but the cap limits the gross benefit to $6,000. That is $72,000 annually ($6,000 multiplied by 12), or 36% of the executive's $200,000 salary. Repeating “60% income replacement” without mentioning the cap would give this employee an inaccurate impression.
Taxes can widen the gap between the stated benefit and spendable income. Disability benefits are generally taxable when attributable to employer-paid premiums; employee premiums paid on an after-tax basis can produce different treatment. Pretax employee payments can be treated as employer payments for this purpose. The actual funding arrangement must be reviewed.[1]
Suppose a supplemental policy is proposed to provide another $3,000 a month under its own terms. The combined gross amount would be $9,000 monthly, or $108,000 annually, before taxes and any coordination or offsets. That equals 54% of salary. The proposal still needs underwriting, eligibility and contract review; it is not proof that the employee will receive $9,000 for every disability.
Review the definitions that can change a claim
Ask how the policy defines disability and whether that definition changes after a period of time. Review waiting periods, benefit duration, exclusions, offsets and how bonuses or other compensation are treated. A supplemental contract may use different definitions from the group policy, so the two should be examined together.
Portability also deserves a direct question. Can the employee continue coverage after leaving the company, on what terms and at what cost? Conversion or continuation rights may have deadlines and may not preserve the same benefit or premium. A benefit intended to support retention should be explained accurately rather than relying on an assumption that it always follows the employee.
Underwriting can affect availability and pricing. A proposed benefit should not be announced as approved coverage before the necessary steps are completed. If the employer is considering a program for a group of employees, obtain advice about eligibility classifications and applicable nondiscrimination or other requirements.
These details help the business avoid paying for an apparent improvement that does not address the actual gap. They also help employees understand what remains their responsibility to fund or insure independently.
Separate life insurance for the employee from key-person coverage
A group life formula can have the same cap issue. If the hypothetical executive's benefit is two times salary with a $250,000 maximum, the formula suggests $400,000 but the cap limits coverage to $250,000. The difference is $150,000 ($400,000 less $250,000). Whether that amount is adequate depends on the employee's household obligations and other resources.
Employer-provided group-term life insurance can also create taxable imputed cost when coverage exceeds the applicable exclusion, generally associated with the first $50,000 of coverage under the rules. The taxable amount is determined under the applicable method; it is not simply the death benefit above $50,000 or necessarily the premium the employer pays.[2]
Key-person insurance serves a different purpose. If the company owns a policy and is the beneficiary, the proceeds are intended for the business under that arrangement. They do not automatically replace the employee's household life insurance. A $500,000 company-owned policy should not be added to the employee's personal coverage total unless the actual arrangement provides that benefit.
Employer-owned life insurance has its own notice, consent, tax and reporting considerations. Address those before coverage is issued rather than treating them as paperwork to complete after a claim. The company's need for liquidity and the employee's family's need for support are distinct planning questions.[3]
Make the review useful for governance and retention
For ERISA-covered welfare benefits, apply the appropriate fiduciary and administrative process, including prudent provider oversight and accurate communications. Executive classifications, ownership and the type of arrangement can affect the analysis. Do not assume every supplemental benefit has the same legal or tax treatment.[4]
Give employees a concise comparison of the existing benefit and any proposed supplement. Show the covered compensation, cap, likely tax treatment under stated assumptions and major conditions. Explain which conclusions require the employee's own adviser to evaluate personal needs.
Finance should compare premiums and administrative costs with the gap the program actually addresses. HR should confirm enrollment, evidence-of-insurability requirements, payroll treatment and what happens on departure. Retain the benefit calculation with the current policy terms and assign responsibility for reviewing compensation changes so a growing salary does not quietly create a larger shortfall.
Start with the highest-paid employees' actual benefit calculations and one representative midrange salary. The comparison can reveal whether the group formula works as intended across the workforce. From there, evaluate a targeted improvement based on protection, cost and clear administration rather than an attractive percentage in a benefits brochure.
Related reading
- Key-Person Coverage and Buy-Sell Funding Serve Different Purposes
- Executive Bonus Benefits: Who Owns the Policy and Who Pays the Tax?
Have more questions about key-employee benefits and coverage design? Email Dave at dave@financialforte.com to discuss your questions and next steps.
The contact invitation is current; it does not imply this contact path existed on the historical reference date.
Educational information, not personalized investment, tax, legal or benefits advice. Examples use hypothetical assumptions. Verify current rules and your circumstances before acting.
Sources
- [1] IRS Publication525: Taxable and Nontaxable Income (2025) — February25,2026 printed cover
- [2] IRS Publication 15-B: Employer’s Tax Guide to Fringe Benefits — December 20, 2024 cover; 2025 edition; IRS Publication525: Taxable and Nontaxable Income (2025) — February25,2026 printed cover
- [3] IRS Notice 2009-48: Employer-owned life insurance — June 15, 2009 IRB
- [4] Understanding Your Fiduciary Responsibilities Under a Group Health Plan — September 2023
