Private Equity Firms: Closing the Disability Insurance Coverage Gap

After a challenging 2020, the private equity market is expected to thrive in 2021. Even amid continued uncertainty related to COVID-19, two-thirds of private equity investors expect deal activity to increase in the year ahead, according to S&P Global Market Intelligence.

Private equity investors often scrutinize deal risks closely. But they are not always as mindful of their personal risks. One question that is not often asked by private equity professionals — especially amid bull markets — is: What happens if I die or am disabled after suffering a serious injury?

This is not a subject that most people want to think about. But it’s a very real risk that private equity professionals must plan for — and for which many lack sufficient protection.

PE Executives Often Unaware of Their Risk

Private equity firms typically employ younger people with high salaries. These individuals earn incomes that are often substantially higher than the level of life and disability protection offered by their employer-sponsored standard group life and disability programs. This can be especially problematic because many of these executives have significant housing and education expenses to cover.

Take, for example, a young married mother of two who is disabled because of an accident or a medical condition. Her employer’s group disability benefits program provides her with $10,000 per month — $120,000 per year — which is taxable as ordinary income. Her yearly salary prior to being disabled, however, was $1 million.

This woman’s disability income gap is obvious. And unless she has significant passive investment income or savings to tap into, she will be challenged — at best — to continue to meet her monthly living expenses.

The reality is that few people under 40 years old who are earning  substantial incomes have the necessary savings and liquidity to continue managing critical expenses while earning a fraction of their pre-disability salaries. That means these individuals — and their employers — must rethink how to close the gap.

Broadly speaking, private equity companies have two options for providing more robust disability income protection for their highly compensated executives.

Option 1: One-Off Individual Solution

The first potential solution is for each individual to apply for a standalone disability policy.

Our married mother of two, for example, can work with an advisor recommended by her private equity employer to secure a personal disability income policy with a limit over and above the benefit provided by her employer-sponsored plan. These personal policy benefits would not replace the group coverage; they would simply be layered on top of those benefits.

To qualify for a personal policy, any executive will need to undergo financial and medical underwriting. Among other things, the disability insurer will require copies of tax returns from the last two years. An individual executive would also need to complete and pass an insurance physical.

Option 2: A Coordinated Approach

An alternative strategy is for a private equity firm to gather all eligible highly compensated executives and make application to an insurer together.

Because an insurer benefits from a spread of risk under this approach, it typically offers each executive a personal policy with little (if any) financial or medical underwriting. Generally, no tax returns or insurance physical are required — as long as an executive has been actively at work for a specified period of time, they should be issued a personal policy.

Such a policy is personal, is portable if an executive leaves employment, and typically can be purchased with a substantial discount off the customary pricing offered by insurers.

Getting Started

For any private equity firm seeking to help close the disability income gap for its highly compensated executives, it’s important to engage the right broker. Specifically, firms should seek a broker with the experience, market presence and relationships, and technology to design, communicate, and implement a program of this nature.

In a competitive labor market, private equity companies must be aware of any opportunity to enhance, retain, and reward the executives who will help the company grow. Providing protection for perhaps the most important element of any young executive’s life — his or her income — can be perceived as adding significant value. And choosing a broker with a long history of administering life and disability programs can provide employers and key employees with comfort and peace of mind.

Interested in learning more? Contact your Mercer benefits provider to discuss expanding coverage options that may be right for you.