Group Disability Insurance: Pearls & Pitfalls
Some employers offer group disability insurance as part of an employee benefits package. On average, about 78% of employers provide short-term disability insurance while 63% provide long-term disability insurance (Miller). Deciding if group disability is sufficient coverage requires comparing the quality of price and coverage to that of a generic private insurance policy.
Premium Assessment
Group disability can be a great way to receive benefits at a significantly lower cost than private insurance if the employer pays part of– or all of– the premium. Private insurance, on the other hand, always requires out-of-pocket premiums from the policyowner.
Group disability insurance can also be more cost-effective for women if employees are required to pay the premium. Private disability insurance premiums run higher for women on average because women are more likely to develop a disability (RPG). For group disability insurance, however, the risk rating for employees is averaged between male and female, usually reducing the cost for women.
Benefit Assessment
There are downsides to the benefits provided in group disability insurance. In general, disability insurance calculates coverage amount by assessing the insured’s after-tax income. If an employer covers the full premium for a group disability policy, the benefits are taxed as ordinary income in addition to the coverage amount reflecting one’s after-tax income (Lalley). This leaves an employee with coverage similar to paying income taxes twice. Contrastingly, private disability insurance does not take taxes from benefits because the policy owner pays the premium with after-tax dollars.
Many group policies, as well, have income caps which limit the amount of coverage an employee can take regardless of their income (Lalley). Income caps can leave an employee underinsured, especially if the policy is covered by the employer.
Finally, most group insurance policies do not define any additional pay as income, such as overtime and bonuses, when determining coverage amount.
Coverage Assessment
A huge positive for group disability insurance is that there is no underwriting requirement. It is considered guaranteed insurance, meaning that employees with preexisting conditions that would otherwise pay expensive premiums or fail to obtain coverage through private insurance can have quality coverage through their employer.
Group coverage, however, typically has a stricter definition of “disability” compared to private insurance. This narrows the opportunities for employees to claim and receive benefits if they are unable to work. Private insurance, on the other hand, offers a broader definition, covering more causes for employees forced to leave work.
Another group disability insurance impediment is the inability to acquire riders that enhance policy coverage, such as the “own occupation” rider. This rider offers coverage if the employee cannot perform the main duties of their current occupation, even if they are able to work in another occupation. In this way, group policies do not provide the employees protection from the possibility of a decrease in income.
Additionally, because the coverage hinges on the employer’s policy contract with the insurance company, group disability insurance is also not portable. Employers sometimes provide options to carry over the insurance into a private policy after their employment has ended, but this option is often costly and retains the lesser coverage options from their group insurance.
Conclusion
Group disability insurance is convenient and cost-effective but often leaves holes in the quality of coverage. The most effective coverage seems to come from private insurance in which a policy can be built around the individual’s needs. Group insurance should be regarded as helpful supplemental coverage, especially if the cost of premium is covered by the employer. Using group insurance as a steppingstone to fully rounded disability protection is the best way to use the benefits that are offered while also using the opportunity to obtain the maximum amount of coverage with a private disability policy.
Author: Andrew Pelletier
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