LONG-TERM DISABILITY
Undermining effect of inflation
In the midst of the largest inflationary surge in over 30 years , consumers are facing price hikes in everything from groceries to automobiles . In response to rising costs for daily goods and services , workers are reevaluating their savings rates , accumulation goals , and distribution requirements for retirement income sufficient to maintain their lifestyle .
As financial professionals , we are recalculating portfolio values and having conversations with clients about reducing goals or adjusting time horizons to achieve those goals . We are discussing the long-term challenges created by sustained periods of inflation .
Some of these challenges are more obvious and easily explained than others . One of the more apparent concerns to our clientele is the effect inflation has on the purchasing power of their current cash flow . It ’ s fairly easy to illustrate the cost of everyday items today versus their cost a year ago . Other consequences are not as easily understood , such as the impact on investment portfolios and interest yields .
Another not-so-obvious effect concerns your clients ’ Group Long-Term Disability ( GLTD ) plans . During periods of high inflation , the absolute value of a GLTD contract can be greatly diminished .
Let ’ s say an executive earns $ 200,000 a year and has an employer-paid GLTD policy with a benefit of 60 percent , up to $ 5,000 a month or $ 60,000 a year . Before we even begin to calculate the impact of inflation on this situation , there ’ s another important issue to consider . Since the employee is highly compensated , he or she will not get to the maximum 60 percent participation rate of the GLTD . The employee will reach the $ 5,000 a month limit on the first $ 100,000 of earnings , leaving the second $ 100,000 of earnings unprotected and a replacement ratio of just 30 percent .
We have the opportunity to help employers understand how the benefits they provide are impacted by the times , whether by inflation , low interest rates or a pandemic .
24 Perspectives Q2 2022