Is group disability insurance worth it?

Group disability insurance policies are often very affordable and maybe even subsidized by your employer. But group plans often offer less coverage.

Zack Sigel 1600

Zack Sigel

Published November 16, 2018

If you have disability insurance 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, but many employers offer long-term and short-term disability insurance as part of an employee-benefits package, like health insurance.

Employee-sponsored disability insurance is called group disability insurance. Because many of your colleagues buy into it, group disability policies are often less expensive than those you buy individually.

However, group disability insurance often offers less coverage, and more restrictions on how to access that coverage, than private long-term disability insurance. But group disability insurance can supplement and even enhance your private coverage, so if your employer offers it, you should consider it even if you already have a private plan.

Read on:

The pros and cons of group disability insurance

Group disability insurance is coverage from your employer for when you become disabled and can’t work. For many people, the relatively smaller benefit amount and shorter benefit period of group disability insurance is enough coverage. But if this coverage falls short of your needs, you may need a more robust private disability insurance policy.

Group disability insurance may be cheaper…

A private long-term disability insurance can cost upwards of $100 per month for a 30-year-old man taking out a policy for $5,000 per month in coverage. Group disability insurance could be significantly less expensive, but it won’t offer nearly as much coverage.

…but coverage amounts are lower.

You could be limited to a benefit amount – the amount you get paid each month by the insurer while you’re disabled – set by your employer. This may help replace your income while you’re injured or sick and can’t work, but it could also fall short. A good rule of thumb is that long-term disability insurance benefits should replace around 60% of your pretax income, so if you’re being paid a predetermined amount, it could be much less than that.

To make sure you’re getting enough coverage, a licensed representative from Policygenius can help you understand your options and choose long-term individual disability insurance that complements your group coverage.

Both long-term and short-term policies are available

Although this is heavily dependent on your employer’s benefits options, it’s often possible to get either a long-term or short-term disability insurance policy, or even both. (You usually can’t purchase short-term disability insurance as an individual.) The difference between them is twofold:

  • Short-term disability insurance has a shorter elimination period, the time you have to wait after becoming disabled before the insurer starts paying your benefits. While long-term disability insurance typically has a waiting period of 90 days, short-term disability insurance policyholders typically only have to wait a week or two.

  • Long-term disability insurance has a much longer benefit period, the time during which you receive monthly benefit payments until you either recover from your disability, your benefit period ends, or you die. Long-term disability insurance can have a benefit period that lasts until age 65 (or 67 with some insurers), but short-term disability insurance benefit periods often end after just a few months.

Group disability insurance is easier to apply for…

Unlike private disability insurance plans, you won’t need to prove your income when you apply for the policy. In many cases, you’ll also be able to skip the medical exam, as group disability insurance policies are frequently “guaranteed-issue.” That means you’ll have the same coverage as colleagues who are healthier (or less healthy) than you.

…but you can’t take it with you.

Group disability insurance is not portable, which means that when you leave your job, you’ll lose your coverage. Private plans continue covering you as long as you keep paying the premiums.

Pre-existing conditions

One advantage of group disability insurance over private disability insurance is that you can usually get pre-existing conditions covered once you’ve had the policy for 12 months or more. Under a private policy, a given pre-existing condition may be excluded from coverage, meaning that if it causes your disability, then you won’t be able to receive benefits for it.

Definition of disability

Group disability and individual disability insurance each have similar definitions of disability. You have to be totally disabled – and seeing a physician for treatment – to be able to claim full benefits.

Like individual disability insurance, your eligibility to claim benefits from your group disability insurance policy hinges on whether it’s an own-occupation or any-occupation policy. Own-occupation disability insurance pays benefits even if you’re able to work another, less-demanding job, although your benefits could be reduced by your wages from the new job. Any-occupation won’t pay benefits if you’re able to work another job you’re qualified for.

Note that some group disability policies have only a limited own-occupation period while you’re disabled, after which your coverage becomes any-occupation.

Under both policies, you can also get the following types of coverage:

  • Partial disability benefits — also called “residual disability benefits”, these are prorated benefits paid for a proportion of lost income, lost time, or lost responsibilities when you’re disabled but don’t need to miss work entirely.

  • Presumptive disability benefits — these are benefits paid for a disability so severe that you’re presumed unlikely to ever recover, such as losing two or more limbs, or the use of your ears, eyes, or speech.

Workers’ compensation can reduce your benefits

If your injury was caused on the job, you could be eligible for workers’ compensation. However, your group disability insurance benefits will be reduced by the amount you receive from workers’ comp.

Receiving Social Security disability insurance (SSDI) benefits could also reduce your group disability insurance benefits, which happens with some private disability insurance policies as well.

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Disability insurance is meant to replace your income when you become disabled.

Group disability insurance from an association or membership organization

While group disability insurance is typically offered by employers, some membership organizations and associations also offer group disability insurance. These policies are virtually identical to those which you can get from your employer. They're more affordable than individual disability insurance, but they also could offer lower coverage.

However, association/membership organization disability insurance has several advantages over employer-provided group disability insurance.

For one, these plans are often portable as long as you remain a member of the association in good standing; even if you change jobs, the organization will continue to provide you with coverage. Additionally, benefits may be tailored to the needs of the group's members.

Unions and trade organizations

Labor unions often offer disability insurance. For example, members of the Service Employees International Union (SEIU) can get disability insurance through their local. The Freelancers Union and the Writers Guild of America (WGA) also have disability plans.

Many unions that offer disability insurance to their members have a major feature built in: your premiums could be waived if the union calls for a strike or a lockout.

Medical and legal associations

Some medical and legal associations that offer disability insurance include:

  • The American Dentists Association (ADA)
  • The American Academy of Family Physicians (AAFP)
  • The American Bar Association (ABA)
  • The Financial Planning Association (FPA)

How group disability insurance can supplement your private coverage

If you have the option to purchase both group disability insurance and individual disability insurance, you might find the most protection for your income by purchasing both. Here’s when it makes sense to have both.

Your group insurance is short-term

If you can’t get a long-term disability insurance policy from your employer, then purchasing one separately can enhance your short-term group coverage. Since the short-term insurance starts making benefit payments quickly, you’ll be receiving those benefits while you wait out the long-term policy’s elimination period. That means if you’re still out of work when your short-term coverage ends, you may seamlessly transition into long-term coverage and not have to miss out on any benefit payments.

Your group insurance doesn’t offer enough coverage

Group disability insurance is usually limited to what your employer chooses to offer. That means you could have a lower benefit amount and fewer riders to choose from to customize your coverage. However, because group coverage is more affordable, you can save money by letting the coverage from that policy offset some of the coverage from your private policy and reducing your premiums on the latter.

Are group disability insurance benefits taxable?

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.

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.