Disability insurance is designed to protect your income in the event that an illness or injury prevents you from working. As such, it’s a critical part of creating a sound financial plan for yourself (and your family). There are two main types of long-term disability insurance, and they each provide essential income protection while also having unique benefits and limitations, which we’ll get into in this month’s blog below. Understanding these differences will help you make the best decision for your needs, where you are, and your future plans.
Key Takeaways
- Group long-term disability insurance is usually provided through employers and covers 50–70% of your base salary. It’s not transferable and may be subject to taxes depending on how the premiums were paid.
- Individual long-term disability insurance is purchased privately by the insured, so it has a higher premium but comes with the benefits of being tax-free (if you paid for the coverage with post-tax funds), more customizable, and portable.
- You may need an individual policy to supplement your group policy to avoid coverage gaps.
- Carefully assess your employment stability, income needs, and long-term goals when choosing between or combining individual and group disability insurance.
Most employees have access to a group long-term disability plan through a benefits package with their employer. They’re easy to enroll in even if you have a pre-existing condition since they cover all eligible employees regardless of their health status or age, though some conditions may not be covered for the first year you are insured under the policy. This makes them convenient and typically low-cost. However, you should keep in mind that group plans don’t cover 100% of your salary if you become disabled. Most plans cover up to 50–70% of your base salary if you have to stop working due to illness or injury.
Other limitations with group coverage include:
- Not portable: If you leave or lose your job, you also likely lose coverage.
- Taxable: Group plan benefits are often taxable, meaning your take-home pay is reduced even more, on top of not receiving 100% of your salary.
- Integrated with SSDI: Most employer-sponsored group long-term disability policies also integrate with Social Security Disability Insurance (SSDI). This can also reduce your monthly payment if you receive SSDI benefits.
- Partial coverage: Since commission and bonuses aren’t part of your base pay, most employer-sponsored group coverage doesn’t cover that income.
How Is Individual Long-Term Disability Insurance Different from Group Long-Term Disability Insurance?
Instead of being provided through your employer, individual long-term disability insurance is privately purchased by the insured from an insurance company. The higher premium is the most notable disadvantage of an individual policy compared to a group policy. However, considering the differences between the two, it is to be expected. So, how is individual long-term disability insurance different from group long-term disability insurance? Let’s discuss.
Since individual policies are purchased by the individual and not an employer, you keep your coverage even if you change jobs. However, to ensure the insurer cannot change the terms once the policy is issued, it is recommended that you get a non-cancelable and guaranteed renewable policy.
As we mentioned earlier, individual policies come with a higher premium. But since you’re paying with after-tax income, the benefits are usually tax-free, which means a larger payout. Another reason for higher premiums is customizable coverage that allows for additional benefits like cost-of-living adjustments and future purchase options, so you have the guarantee that your coverage can adapt over time.
Flexible definitions are another benefit of individual policies. High-quality individual plans often use an “own occupation” definition of disability. This means you’ll receive benefits if you can’t perform your job’s specific duties. On the other hand, some policies may shift to an “any occupation” definition after 2–5 years, which could reduce your benefit eligibility over time.
Key Considerations for Group Long-Term Disability Insurance vs. Individual
It can be challenging to know which plan you should choose. If you’ve taken a good look at your finances and still aren’t sure, speaking with a financial advisor could give you some clarity and tailor the best solution for your financial security. Depending on your circumstances, here are some points you should consider:
- Employment stability: Do you plan to stay with your employer long-term? Studies show that Millennials and Gen Z don’t stay at a job nearly as long as their predecessors, with most staying with a company for less than three years.
- Income needs: Can you survive on a portion of your base salary? If you don’t think this will fully meet your needs, even for a short period of time, you should consider supplementing with an individual policy to help bridge the gap.
- Portability: Unlike group plans that end when you leave your job or are let go, you get to keep your individual insurance regardless of your job status as long as you pay your premiums on time.
For most people, the best way to get comprehensive coverage is by combining an individual policy and group long-term disability through their employer.
Understanding Your Individual or Group Long-Term Disability Policy with Sinclair Law Firm
For many people, disability insurance is a vital part of their financial plan as it offers critical protection when life’s unexpected events disrupt their income. By understanding the pros and cons of both individual and group long-term disability coverage, you can make an informed decision to safeguard your financial future. If your disability benefits are being denied, Sinclair Law Firm is here to help! We’ll take a detailed look at your policy and chart a course to get your coverage. Get in touch today to have your questions answered!