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“I have disability insurance through my employer, so I’m already covered.”

By November 24, 2020 No Comments


Let’s just set aside this very common statement for now.  By the end of this article, you may have a totally different perspective about this great “benefit” that your employer offers.

Unfortunately, group disability insurance doesn’t quite cover what most people assume it covers.  It can also hinder your ability to maximize a far superior individually purchased disability insurance policy.  That’s probably how you ended up here reading this article in the first place.

Even if your employer offers or pays for a group disability policy for you, I would suggest buying your own policy if you can. I like to use this comparison: Life insurance is simple – if you die, they pay a claim, and that’s all there is to it. Disability insurance is much more complex as there are a lot of moving parts that determine how much you get paid, when you get paid, and for how long you get paid. Quality of the contract terms and definitions are far more important than price when it comes to disability insurance.  If you are shopping for the cheapest coverage, you’ll get what you pay for.

There are a number of drawbacks to group disability insurance compared to individually purchased DI:

  1. Most group policies only have the “own occupation” definition of disability (i.e. the best definition you can get) for the first two years of a claim, then the definition changes to a less favorable one, often an “any occupation” definition. Individual policies can be purchased with the own occupation definition for the entire benefit period.
  2. When you leave the employer, you lose the group coverage. The individual DI policy stays in force when you change employers, and you do not have to re-qualify for coverage or benefits as the contract is already guaranteed. Most people do not stay with the same employer for their entire career these days.
  3. Group disability benefits are taxable when the employer is paying the premium, while individual DI benefits are non-taxable since you’re paying the premiums with after-tax money.
  4. Group policies generally do not cover partial disabilities, or have a very limited benefits (such as 6-12 months maximum coverage). This is a massive difference as most disabilities will either start or end as a partial disability, or with a loss of income after you’ve fully recovered, or a loss of income due to reduction in hours.
  5. Group policies generally do not cover any bonus income or restricted stock awards, it’s usually base income only. If your compensation is made up of part base salary and part bonus, you may not have as much coverage as you think.
  6. There is usually no Cost of Living Adjustment provision in a group policy, which is an optional benefit for individual coverage.
  7. The employer or insurance company can terminate or change the group policy at any time. If for some reason the group coverage was terminated, you could be left with nothing, and at that point it may be too late or too expensive to get your own coverage.
  8. Many group LTD policies have a benefit cap such as $5,000/month, $10,000/month, etc. If you are a high income earner, you may be well above the capped amount, leaving much of your income exposed/uncovered.
  9. Just about all group policies have a 24-month limitation for mental/nervous disorders, while you can get an unlimited benefit for an individual policy. This may not sound like a big deal now, but mental/nervous disorders are about ~10% of all disability claims and are the third-leading cause of disability according to Guardian’s statistics.

Having said all of that, if your group disability insurance is paid for entirely by the employer, you probably can’t opt out of it and will be limited in the amount of coverage you can buy on your own. The individual policy can be purchased with a Future Increase Option rider that allows you to add more coverage in the future regardless of any health changes, which can come in handy if/when you ever lose the group coverage.

Will an individual DI policy be more expensive? Absolutely, no doubt about that one. In general, you get what you pay for with disability insurance.

If you have any questions about disability insurance or would like us to help evaluate your group coverage and what options are available for you on the individual market, please give David a call at 702-476-3805.

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