If you are a full time employee and work for an employer who offers group benefits, chances are you have group disability insurance benefits. Group benefits typically cover about 60% of your gross income to a maximum level amount (for example $10,000/month). If the employer is paying the premiums, the benefits are taxable. If you leave your employer, you may not be able to take your disability policy with you.
Is your group disability insurance enough?
Calculate your monthly needs after tax. Then calculate your salary at 60% and tax the remaining amount. If the net amount is less than your monthly expenses, you should consider adding an individual disability policy to supplement your benefits.
Individual Disability Insurance
Individual disability insurance can be your only disability insurance policy (if your employer does not offer a group policy) or can act as supplemental disability insurance, which fills in the gap between your employer-sponsored plan and the amount you need to survive financially if you become disabled. It is important to think long-term and consider the potential devastating effects of losing your income.
Individual Disability Insurance Policy Provisions and Benefits
- Provide Evidence of Good Health
The insurance carrier can decide whether or not to insure you. As a result, the insurance carrier can be picky with whom they offer coverage to. The good news is this allows the company to be more liberal with policy provisions, providing you with better policy definitions.
- Portable Policy
If you leave your employer, you can carry your individual policy with you and increase it as your income increases.
Coverage cannot be cancelled by the insurance carrier as long as you pay your premiums on time.
Benefits are usually tax-free income during disability if you pay with personal dollars.
- Protects Your Insurability
If you experience an adverse change in health, you can increase your individual / supplemental policy in the future without worrying about losing group benefits if you leave your employer.
Supplemental Disability Insurance
While the same policy provisions and benefits of individual disability insurance apply, note that there is a maximum amount of supplemental benefit you are eligible for based on your income and group benefits in force.
Group Disability Insurance
Short-Term Group Disability Insurance
Short-term group insurance provides weekly benefits for employees who are totally or partially disabled by a covered injury, illness, pregnancy or mental disorder. Typically short-term disability insurance is cost prohibitive to an individual. Therefore an individual would be better off signing up for the short-term disability insurance through their employer.
Long-Term Group Disability Insurance
Long term disability insurance (also known as LTD) is defined as insurance with an elimination period of at least 90 days. The benefit period (time when benefits are paid after satisfying the elimination period) is typically 2 years, 5 years, 10 years, to age 65 or lifetime. The longer the benefit period, the higher the premium. Long term disability insurance is intended to cover more catastrophic types of claims that last a long period of time.
Group disability plans tend to have benefit periods to age 65, and typically provide the totally disabled employee with up to 60 percent of pre-disability income to a specified maximum such as $10,000/month. Coverage is available for both short- and long-term disabilities and often without medical evidence of insurability. Group disability insurance helps attract and retain quality employees and is tax deductible to the business.
Drawbacks to a Group Disability Insurance Policy
- Total Disability Definition
Most group policies require you to be totally disabled to receive benefits.
- Not Portable
Benefits are not portable if you leave your employer.
- Potential Cancellation
Benefits can be cancelled by employer.
If the employer is paying the premiums, the benefits are taxable to you. This diminishes the amount of benefit you take home.
- Benefit Limit
Benefit amounts are capped. Reduces replacement ratio for higher incomes.
How do you decide if you need short term or long term disability?
If only the answer were easy! If you actually knew how long your claim would be, you would know how long you needed the benefits. However, the best way to assess is to look at your financial situation and determine how long you could survive without your income.
If you are young and new in your career, you may not have much money in savings or in a retirement fund. You also have a potentially longer period of vulnerability and therefore may need a longer benefit period.
If you are considering a long term disability insurance policy and have a significant amount of money saved for retirement, you may be able to consider a shorter benefit period to cover your risk until you are able to tap your retirement savings without penalties.
For more information about short term and long term disability insurance, please contact Set for Life.
Association insurance is similar to group insurance, but typically has a less favorable definition of disability and has limited benefit amounts. Association insurance policies may also not have some riders available such as increase options or COLA.
Read the fine print. Sometimes the policies have a favorable definition of disability the first year or two of claim and then become very restrictive.
It is important to consider supplementing your group policy with an individual policy. This will provide you with coverage that is portable, more specific to your occupation and will increase your overall benefit.