How to decide whether your group coverage cuts it.
Disability insurance is a great way to protect your income – and your financial plan – in the case you’re unable to work due to injury or illness. A lot of people get some sort of group disability coverage through their employer, but it’s generally not enough coverage to protect you for the average duration of disability (2-3 years).
Enter supplemental disability insurance, a policy that adds on to your group coverage to cover any gaps and give you the protection to maintain your lifestyle if you become unable to work due to illness or injury.
Do you need supplemental disability insurance? Read on to find out:
The first step to deciding if you need more disability overage is to understand what coverage you already have. Disability insurance is usually available from a few sources:
What it is: Employer-sponsored disability coverage varies widely. According to the Insurance Information Institute, about half of large and mid-size U.S. employers provide some long-term disability coverage, and in some states employers are required to provide short-term disability insurance. Your job may provide both, or neither.
What it pays: Coverage varies widely. Many group plans only cover 60% (or less) of your income. Plus, since your employer is paying for it, it’s taxable. That means that when all is said and done, your actual take home pay could be closer to 40% of your income than 60%.
How to find out if you have it: Talk to your employer about what benefits you are eligible for and how they pay out.
What it is: Social Security disability insurance is available to workers who have a sufficient number or work credits and can no longer work due to a covered disability or injury.
What it pays: SSDI payments are based on how much you have paid into the system over your working life. The average benefit is just $1,171 per month, with payments maxing out at $2,687. Benefits are paid after a 5-month waiting period.
How to find out if you have it: If you have a job and pay taxes (hint: this is every job), you are eligible to apply for Social Security disability insurance if you become disabled. Waiting times for an answer can run between 1 and 2 years, and just 39% of applicants get approved.
What it is: State insurance benefits are statutory in California, Hawaii, New York, New Jersey, Rhode Island, and Puerto Rico. The benefits are funded by mandatory employee contributions.
What it pays: State plans vary, but generally, they pay 60% to 70% of wages for up to 52 weeks. One thing to note: many long-term disability insurance programs, especially group insurance, require you to apply for SSDI and subtract your SSDI benefits from your monthly benefit.
How to find out if you have it: If you live in California, Hawaii, New York, New Jersey, Rhode Island, or Puerto Rico, your state either provides or mandates short-term disability. Check with your employer or your state’s website to get details on coverage.
Once you determine your current coverage, there are three questions you need to ask yourself (and research thoroughly) when deciding whether to buy supplemental disability insurance:
Many people simply don’t have enough coverage through their work’s group plan.
Many group plans only cover 60% (or less) of your income. Plus, since your employer is paying for it, it’s taxable, meaning your actual check could be closer to 40% of your income. Plans might also have maximum benefit amounts, which means that, especially for high-income earners, the income received for your family isn’t nearly what you’re used to each month. Would you be able to cut your expenses by half to make that workable?
If you add a supplemental disability insurance plan to your group plan, you can get a discounted rate that can bring your coverage up to 80%. That’s much more manageable – by scaling back expenses and/or pairing it with an emergency fund, there’s less of an impact on your lifestyle.
Most group plans aren’t as robust as a private disability insurance policy. Most employer-provided disability insurance plans are own-occupation policies for the first two years of disability before switching over to any-occupation policies for the remainder of the benefit period; some may never be own-occupation. If you have a residual disability and can’t perform your job to the same capacity as you could before – you’re still earning money, but less of it – your employer’s group policy might not cover that at all.
Compare that to a private disability insurance policy, where you can get own occupation covered for as long of a benefit period as you want – two, five, or 10 years, or even go all the way to retirement age. Considering one in eight workers will be disabled for five or more years over the course of their career, having that flexibility in terms of length of coverage is crucial.
Your work coverage might also be insufficient if you qualify for Social Security disability insurance (SSDI). The group coverage could be offset by your SSDI coverage, meaning you won’t get as much as you were expecting through work. The good news? A private policy won’t be affected.
Buying a supplemental disability policy ensures that you have the most comprehensive coverage possible. If you’re relying solely on the group coverage you get through work, you don’t have control of the type of policy it is – which means you could leave yourself vulnerable to loopholes.
If you have health insurance through your employer, you know that if you ever lose (or leave) that job, you lose your health insurance, too. Well, your group disability insurance works the same way.
This goes back to the last point of not having control of your policy: if you leave, or if your employer just decides to cancel the coverage, there’s not much you can do about it. You’re at the whim of your employer.
If you don’t have supplemental insurance and you leave your current employer, whether to take a new job or start your own company, you’re starting at square one in terms of coverage. And if you’re later in your career, you might hit a roadblock if you decide that now’s the time to get your own coverage.
Just like with life insurance, disability insurance requires applicants to go through an underwriting process. If you’re in poor health or have pre-existing medical conditions, it could prove difficult to find affordable disability insurance coverage. That’s why – as with life insurance – the earlier you buy, the better your chances are of getting the protection you need at a price you can afford.
So you’re ready to get supplemental disability coverage, right? Great! The best part is that it’s not any more difficult than if you were applying for a long-term disability insurance policy without group coverage already in place.
Buying a supplemental disability policy is usually less expensive than buying a single standalone policy, because you’re usually buying a smaller amount to work with your group coverage. Including a future purchase rider will allow you to increase your coverage in the future, with no further underwriting, if you leave your company, lose your group disability coverage, and need more protection.
The only real difference in applying for supplemental insurance is disclosing that you already have group coverage in place. You’ll be asked this on the application, so you’re sure to see it during the process. When disclosing your group policy, you’ll need to disclose the coverage amount, the benefit period, and the elimination period (how long after your disability before you’re eligible for benefits). The amount you can apply for depends on how much coverage you have through work, whether it’s employee- or employer-paid, so it’s important to be truthful so you don’t wind up being over insured.
Having group disability insurance is a great perk from your employer, but it’s not enough to stop there. To ensure that your family has the protection they deserve, you may need to beef up your coverage with a private supplemental policy. After seeing all of the potential gaps in coverage – whether it’s the amount of income replacement you’ll get, the length of time you’ll be protected, or the flexibility you have with your policy – you owe it to yourself to at least review your group policy and see how you can better fill your financial safety net.
Logan Sachon is the co-founder of The Billfold, a groundbreaking personal finance site for millennials that was named one of Time's 25 Best Blogs of 2012. Her work has been published in New York Magazine, Glamour, The Guardian, BuzzFeed and more.