Making sure you have enough income to support your family if you become physically challenged and can’t work for an extended period is an important part of any financial plan. Social Security Administration studies show that just more than one out of every four 20-year-olds will become physically challenged before reaching retirement. Most people recover from the disability and return to work, but some people are forced to take different jobs with lower incomes or may never work again.
Group Versus Individual Coverage
To help provide income in the event of disability, many employers offer their full-time employees group short and long-term disability coverage as a benefit. You can also purchase an individual disability income policy to either supplement a group plan or provide additional coverage if a group plan is unavailable.
There are many differences between group and individual coverage. Group disability coverage is tied to your employment and if you change or lose your job the coverage is not portable. The cost of group coverage can also change year to year. Individual disability policies usually have higher premiums, but offer better benefits because applicants are individually underwritten.
In contrast, group benefits cover all eligible employees, regardless of their health. Once issued, the language, benefits and costs of an individual disability policy are contractually guaranteed, even if you change your occupation or employment. Individual policies may also be issued with exclusions that limit claims that are due to pre-existing conditions.
Disability claims can be more complicated and frequently take more time to resolve than life insurance. Especially since most disability claims are due to illness or a condition that is not apparent – such as muscular, skeletal or mental health problems – rather than an accident.
Here's why. Higher paying, professional white collar jobs tend to have better definitions than blue collar jobs. And group policies tend to have weaker definitions than individual policies. The best definition of disability is when you can’t perform the duties of "your own occupation." However, some policies define disability as the inability to perform "any occupation." This broader definition could place some policyholders at a disadvantage. It is also important to look at how long the own occupation definition lasts. Some policies switch to any occupation after being on a claim for two to five years and if there is specific language about claims related to pre-existing conditions and mental or emotional issues.
Individual policies should be issued as non-cancelable and guaranteed renewable, which means the insurer can’t modify the policy once it is issued. Policies may also allow for a gradual return to work, where you start out part-time and continue to receive a partial benefit, or if you cannot perform the duties of your occupation, allow you to work in another occupation and still collect full benefits.
Unlike life insurance, where if you are deceased the insurer automatically pays the claim, disability claims are more complex. This is why the terms and definitions in a disability policy are critical. The more precise the definition, the easier it will be to make a claim.
Group disability coverage is tied to your W-2 income or base salary. Benefits, bonuses, commissions, retirement plan contributions and incentives are typically not included. Individual policies are more liberal and sometimes offer a variety of compensation sources. You are also buying a set amount of benefit, such as $5,000 a month, and may not have to document your income when going on a claim.
Group short-term (GSTD) benefits vary in the dollar amount paid, some pay 100% of earnings, and may begin immediately or after a short elimination period. Most group long-term (GLTD) coverage has a 90 day elimination period, although individual policies do allow for a longer elimination period. GLTD disability benefits are usually limited to 50%-60% of base salary and often have a maximum monthly benefit, regardless of how much you earn.
Some employers do offer the ability to buy additional coverage up to 70% of earnings or salary. If no additional coverage is available, you can buy an individual policy to supplement the group plan. Individual policies offer higher monthly benefit limits and have cost of living adjustments and future purchase options.
Integration With Other Benefits
Employer-provided long-term disability plans usually integrate benefits with Social Security Disability Insurance (SSDI). This means the group disability benefit you receive may be reduced dollar for dollar by other benefits received. Individual long-term disability policies vary by company and benefits may not be subject to a reduction if you receive SSDI. The policy premium would be higher, but your combined income if physically challenged would be the combined benefits. Usually, individual plans covering blue-collar and high-risk occupations integrate with SSDI.
The Bottom Line
It’s important to figure how much income you need every month to pay your bills and where that income will come from. Here are some questions to think about:
- What kind of group and /or individual disability coverage do you have?
- How quickly can you reduce expenses?
- Do you maintain an adequate cash reserve?
- Does your household have one or two incomes?
- Do you have other sources of income (rental property, investments, etc.)?
Nobody likes to think about becoming physically challenged. However, you need to protect your family’s financial security and relying on SSDI or workers compensation benefits is not a great strategy since many claims are denied. And even if you are eligible, it may take months before you begin receiving benefits.