Insurance plans are simply a transfer of risk. Any insurance program's value is worth its weight in premium if the event you are insuring happens and you suffer significant financial loss.
For AbbVie employees, this is where short- and long-term disability plans come into play. AbbVie's base plans are paid for by AbbVie, so the only decision you must make is whether to pay for the additional coverage.
To begin with, the very title of “disability” coverage is misleading.
Just the word disability leads you to an image of an individual paralyzed from the neck down and permanently in a wheelchair.
On the contrary, you qualify for short-term disability benefits as soon as you are out of work for more than seven consecutive days and are medically classified as "disabled." That could be a simple tweaked back after a stressful game of pickleball or from strenuous yard work.
If you play the odds, you are more likely to qualify for disability benefits during your working years than you are to die, which is sobering to think about.
To illustrate how all this works, I want to introduce you to AbbVie executive John Doe.
John Doe recently got into a car accident by no fault of his own and injured his back and neck. After a few days in the hospital, he is back home and recovering but will need many months of physical therapy and maybe a minor surgery to repair some damage.
Here is how AbbVie’s Short- and Long-term Disability plans will help John during this time.
- Hourly Sick Pay
For ease, let us say John was in an accident over the weekend and could not work at all starting Monday. John will first qualify for 7.5 workdays (60 hours) of “Hourly Sick Pay” per calendar year at 100% of his base pay. If John is still unable to return to work after this benefit is exhausted, he now qualifies for his Short-Term Disability program.
- Short-Term Disability Claim
After satisfying his "waiting period," which is seven consecutive days of not working, John now receives 26 weeks of Short-Term Disability benefits broken down as follows. The first 13 weeks are paid at 100% of his base pay, and the second 13 weeks at 75% of his base pay. (The definition of "Base Pay" is your base rate of pay, not including sales or marketing bonuses, cash awards, discretionary bonuses, or payments from AbbVie’s Cash Profit Sharing Plan (CPS).)
- Long-Term Disability Claim
John is still unable to return to work after exhausting his 26 weeks of Short-Term Disability plan benefits and now qualifies for his AbbVie Long-Term Disability benefits. Starting his 27th week out of work, he will receive 60% of his monthly base pay for 24 months. The one difference is that this “monthly base pay” includes sales bonuses but no other additional compensation programs. If John still cannot return to work doing ANY job (not just the job he left) after 24 months, he will continue to receive 60% of his base pay until he turns 65 years old.
John starts to feel much better and can return to work and does so for three months before re-injuring his back and neck. When he returned to work, he started collecting his salary again and his Long-Term Disability benefits stopped. However, following a re-injury, if he cannot return to work, he will continue where he left off in his Long-Term Disability claim. If he had returned to work for more than six months before he became reinjured, he would have had to start the process all over again from the beginning.
Long Term Disability benefits are offset by any benefits received from Social Security (which are required alongside AbbVie’s benefits) as well as any federal, state, or retirement benefit amounts received for loss of income.
Important points to remember.
You must be under a physician's care (not related to you), and your physician must be available to provide proof of disability to your benefits coordinator. There is a particular claim process you must follow, which can be found on AbbVie's HR portal.
John’s story, while one that doesn't happen to everyone, is not uncommon. Among men and women, there is a 50% chance of becoming disabled at some point in your career.
The most important issue about being on a disability claim is that it will affect other aspects of your financial planning, like taxes.
Every penny of your disability payments, from the Hourly Sick Pay to the Short Term and Long-Term payments, are all taxed as ordinary income. This causes an already depressed income to be further reduced, even as the cost of care can be far higher than expected. While paying for care from this disability income, there also needs to be money set aside to cover the tax bill that this benefit will generate.
All other AbbVie voluntary programs cease to be available, the biggest one being any retirement plans. When you have a short- or long-term disability claim, all retirement deductions stop as well as any matching. Even if you expect to come back to work within 12 months, you will have missed out on all contributions (401k) pension, etc.) during this period. If your disability persists, that time-lapse in retirement preparation can have a significant impact on your ability to retire. The last, most crucially overlooked, detail is that AbbVie's disability programs only cover your base pay. If your compensation composition is base pay and incentive programs like the AIP, your reduction in compensation could be significant.
You can fill this gap with AbbVie’s Long-Term Disability “Buy Up” Program. Should you participate?
As always, the answer is "it depends."
AbbVie has a Long-term Disability “Buy Up" program where you can purchase an additional benefit with minimal medical requirements. This increases your benefit from 60% of your salary up to 75%. The 75% now includes your bonus in the calculation, something that can be a large part of an employee's overall compensation. The maximum overall benefit is $15,000/mo. As this “Buy Up” is purchased with after-tax dollars (and not a free company benefit), the benefit received is tax-free.
Should you leave AbbVie, it is 100% portable assuming you continue to pay the premiums. If you can afford this coverage, it can be a worthwhile add-on to purchase as Private disability insurance can be much harder to acquire than life insurance given the underwriting that occurs.
There are some important questions to consider before purchasing the "Buy Up" option, such as:
- How many more years are you planning to work?
- What would happen to your cash flow if you experienced a Long-Term interruption in your compensation?
- Do you have high medical risks that increase your likelihood of a claim?
These insurance conversations take place with ALL clients of Retirement Matters and it’s made sure that every client has a recommendation that is customized to their situation.