Group disability insurance policies are often very affordable and maybe even subsidized by your employer. But group plans often offer less coverage.
Disability insurance is a necessary part of your financial plan. If you have a disability insurance plan and become injured or sick and lose your ability to work, you’ll get paid monthly disability insurance benefits to cover your lost income.
Disability insurance can be bought individually – find a carrier, get a quote, pay your premiums. But many workers find that their employer offers disability insurance as part of their employee-benefits package, like health insurance and (sometimes) life insurance.
Employee-sponsored disability insurance is called group disability insurance, because the company’s employees form one large risk pool that helps bring down premium costs across the board. (If everyone in the risk pool is paying the same premium, and nobody’s claiming benefits, the insurance carrier rakes in a profit with less effort than selling individual plans.)
That means group disability insurance policies are often less expensive than their individual disability cousins, and maybe even free to you if your employer subsidizes the cost. That, in turn, means group plans often offer less coverage with more restrictions about how that coverage can be used. Employee-sponsored disability insurance is useful if you only need limited coverage, but if you’re truly concerned about how you’ll pay your bills or put food on the table if you become disabled, you may need an individual plan.
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Similar to buying household products in bulk to save a few bucks per item, group insurance plans are offered at a discount because they’re sold to multiple people at once. When group disability insurance is offered by your employer, many people may purchase the same plan, and you could have considerably lower premiums.
Under a group disability insurance plan, you may have access to both short-term and long-term disability insurance. Short-term disability insurance (STDI) often lasts just a few months, but has a shorter elimination period, the time you have to wait before the disability insurance company pays you benefits. Long-term disability insurance (LTDI) lasts a number of years, including until retirement, but could have a very long elimination period.
Under a group short-term disability insurance policy, some disability insurance companies set benefits as high as 100% of your pre-disability income, which is more than the 60%-80% you can expect to receive from an individual plan. Long-term disability insurance benefits under an employee-sponsored plan are often as low as 50%-60% of your income, although that should be fairly close to your take-home pay.
Group disability insurance works best as a short-term disability insurance plan for which you pay very low premiums in return for low coverage in order to supplement an individual long-term disability insurance plan. If you become disabled, the group STDI payments should tide you over during the LTDI waiting period.
However, if you don’t need that much coverage, disability insurance as an employee benefit may be a better fit for your budget. You get most of the protection of an individual plan, including many of the same perks, such as a survivor benefit paid to your loved ones if you die while claiming benefits or rehabilitation programs to help you transition back into work.
Additionally, unlike individual disability insurance policies, you won’t have to take a medical exam to receive group disability insurance coverage. However, pre-existing conditions may still be excluded from coverage, although group disability policies offer a bit of leniency over traditional disability insurance plans by limiting your exclusions to just those that occurred during a predefined pre-existing condition period that spans a number of months before you took out the policy.
While you’ll pay lower premiums for employer-sponsored disability even insurance, or maybe even nothing at all, you may not get the amount of coverage you need to replace your income if you become disabled and can’t work.
Additionally, it may be harder to qualify for disability insurance benefits under a group disability plan. Under the most lenient plans, you only have to meet an “own-occupation” definition of disability, which means you only have to show that you can’t work at your current job to qualify for benefits, but you can still do other work.
The other definition of disability is an “any-occupation” plan, meaning that you have to be too disabled to do any work, suggesting a much more severe injury or illness and a much higher bar for receiving disability benefits. With an individual disability insurance policy, you can generally choose between one definition of disability or the other, with any-occupation policies offering a lower premium.
However, with a group disability insurance plan, you have to take the definition of disability that comes with your company’s benefits package. In some cases, even an own-occupation plan that you get from your employer may limit the own-occupation disability period, after which you’ll have to show that you’re too disabled to do any work to continue receiving the full benefit amount.
Some group policies also have a preset benefit amount, but that may not be enough for all workers because it doesn’t take into account each person’s coverage needs. Check your employer’s group disability insurance policies, and weigh the benefit amount against what amount of coverage you actually need: is it enough to continue paying your bills – mortgage, car payments, student loans, utilities – as well as help maintain your lifestyle if you become so disabled that you can’t work?
While we recommend getting a group disability insurance plan to help supplement an individual long-term disability insurance policy, you may already be eligible for similar supplementary benefits under the law. One of these is workers’ compensation, which only applies to injuries incurred in the office. The other is Social Security disability insurance, which costs you nothing but has a very strict definition of disability that about 65% of people don’t qualify for. Some states also offer temporary disability insurance, but benefit amounts are low.
Although none of those other options will fully replace your income while you wait out your individual plan’s elimination period, they will help you save on premiums if you rely on them instead of your group disability insurance plan. Whether that works for you is a matter of how much coverage you need between the time you get disabled and the day you can begin receiving disability insurance benefits.
Keep in mind that if you leave your job, you won’t be able to take your group disability insurance with you, and your next employer may not offer it. But a plan you buy yourself stays with you.
Disability insurance benefits are generally not taxed. However, if your employer pays for your premiums, your benefits could be taxed like income. That’s also true if your employer only pays part of your premiums: You’ll be taxed on the portion your employer paid for.
Even if you pay your premiums yourself, if your payments come out of your pretax income, you may have to pay taxes on disability benefits. Check with your company’s benefits administrator about how your premiums are paid so you’re prepared for Tax Day.
Disclaimer: Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.