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Long-term disability insurance protects your income by paying a monthly benefit while you are unable to work due to an injury or illness. Although most self-employed individuals and small business owners buy private insurance, many employees are covered by group benefits through their workplace.
How does group disability insurance work? And what should you be aware of if you have coverage through your workplace? Read on to find out if you are adequately covered by your group disability coverage and what to do if you are not.
- Key takeaways:
- Many employers provide short-term and long-term disability insurance to their employees.
- When evaluating a group LTD plan, the benefit amount and benefit period are among the most important features to consider.
- Individual disability policies are available for employees who find group disability coverage inadequate.
What's In A Group Benefits Plan?
A group plan is a benefits package an employer provides its employees. It often includes several, if not all, of the below benefits.
Life insurance
Life insurance is a staple of group plans. It pays a death benefit to your loved ones if you pass away. While flat amounts like $25,000 or $50,000 are common coverage amounts, you may also come across death benefits that are multiples of your salary, like one or two times. For example, if you earned $100,000 and the death benefit is two times your salary, your family will receive $200,000 if you pass away.
Some group insurance plans will also allow you to buy more coverage, subject to proof of good health. Rates for optional coverage will go up every five years, increasing dramatically once you reach your forties.
Dependent life insurance
On top of covering your life, most group policies will also provide coverage for your spouse and children. Although these amounts are much smaller, like $5,000 for your spouse and $2,500 for your children, they could reduce the financial burden of funeral costs.
Accidental death and dismemberment
If you die from an accident, this coverage will pay another death benefit on top of the one paid by basic life insurance. In addition to accidental death, it will pay a percentage of the coverage if an accident causes dismemberment. For example, the insurance company may pay 75% if you lose an arm or a leg.
Extended health care
Extended health care covers various medical expenses not covered by provincial health insurance. Prescription drugs, paramedical services like physiotherapy and massage therapy, and vision care are some of the more common benefits in this section. Due to its frequent use, employees highly value extended health care benefits.
Dental care
Dental coverage, like extended health care, is another frequently used benefit within the group plan. It will cover basic or preventative services like regular checkups and cleaning but may also include major restorative and orthodontics services.
Health spending account
An employer may provide credit in a health spending account which you can use to pay for eligible health care expenses not reimbursed by the health and dental plans. For example, you can use it to cover the deductible and coinsurance payments.
Short-term disability insurance
The insurance company pays short-term disability benefits if you can’t do your job because of an injury or illness. Benefits can start as soon as the first day of an injury or hospitalization and last up to 26 weeks.
Long-term disability insurance
This works hand in hand with short-term disability benefits to ensure you have financial support if you are unable to work due to an injury or illness. Once short-term disability benefits end, long-term disability coverage begins. We’ll explain how long-term disability insurance works in the section below.
How Does Group Long-Term Disability Insurance Work?
Group disability insurance works much like individual policies. In case you need a refresher, here are the most important attributes of group disability insurance benefits to be aware of.
Benefit amount
The monthly disability benefit is the amount the insurance company pays you while on a claim. It’s typically expressed as a percentage of your income up to a maximum amount.
For example, it may cover 60% of your basic monthly earnings up to a maximum of $5,000/month. If your monthly earnings were $4,000, you would receive $2,400/month in disability income. However, if you earned $10,000/month, your payout would be limited to $5,000/month.
Taxable or non-taxable benefits
You will receive taxable benefits if the employer pays for the group disability insurance and non-taxable benefits if you pay for the group plan.
Waiting period
Also called the elimination period, the waiting period is the number of days you have to be disabled before you start receiving disability benefits. The most common waiting periods are 90, 120, and 180 days.
Suppose your group disability coverage also includes short-term disability insurance. In that case, the waiting period is usually equal to the length of the benefit period for short-term disability benefits, so there are no gaps in coverage.
Benefit period
The benefit period refers to how long you receive disability benefits. The most common benefit periods for group disability insurance are up to two years, five years, and age 65. However, disability insurance benefits will stop if you recover before the end of the benefit period.
Definition of disability
To qualify for disability insurance benefits, you must meet the definition of a disability. That’s where you will see terms like regular occupation, own occupation, and any occupation.
For group disability insurance policies, the regular and own occupation definitions are essentially the same. You are considered disabled if an injury or illness restricts your ability to perform the essential duties of your occupation. Any occupation means you cannot complete the tasks of any occupation for which you are qualified by training, education, or experience.
Although the insurance company will use the own occupation definition in the first two years of a disability, it will change to the more restrictive any occupation definition after that.
Other group disability insurance benefits
You may also see partial disability benefits and cost of living adjustments in your disability policy. The former pays a disability benefit if you can’t perform at least one important task or work a reduced number of hours due to your disability. On the other hand, the cost of living adjustment increases your disability income every year by the inflation rate while you’re on a claim.
Why Offer Group Disability Insurance As An Employer?
Group disability insurance is vital to the success of an organization. Here are a few reasons why you should offer it to your employees.
Attract employees
Employees value group insurance, and a good benefits plan can be the difference between a potential hire’s decision to take the job or move on.
Employee retention
Along the same lines as the point above, group benefits with better insurance coverage may help retain employees vital to your organization.
Customizable plans
Offer a barebones plan to save on the disability premium? Or an enhanced coverage to attract and retain the best employees? The choice is up to you.
Protect your workforce
Employers who value their employees also want to protect their financial well-being. Disability insurance does just that.
Tax efficient
Providing group disability insurance yields better tax efficiency compared to a salary increase. While raises are taxable and can attract additional Canada Pension Plan and Employment Insurance deductions, the premiums for group benefits don’t. Therefore, it’s a tax-free method of compensating your employees.
What Should Employees Know About Group Long-Term Disability Insurance Benefits?
What’s the most important thing about your group disability insurance benefits? Understanding them! While it’s great that you have coverage through work, how do you know if your disability insurance benefits are any good? Wouldn’t it be reassuring to see how they compare to the best coverage you can get? Here are some questions to ask when evaluating your disability benefits.
Does the disability benefit sufficiently replace your income?
The higher the disability income, the better. While you will never replace 100% of your income, you want to get as close as possible. The three things to check are the following:
Percentage of income replaced: Is it high, like 70% or 75%? Or lower, like 50%?
Maximum amount: Are your disability benefits capped at a low limit relative to your regular income?
Type of earnings: If you earn a commission or receive a hefty bonus each year, are these included in calculating your income?
What is the benefit period?
As mentioned above, the shortest benefit period is two years. Although that’s enough to cover some disabilities that only last several months to a year, it falls short if you become permanently disabled. This is especially vital if you are young and have your whole career ahead of you. Look for the age 65 benefit period for the best coverage.
Who pays for it?
If your employer pays for a group plan, you must pay tax on the benefits. Otherwise, you will receive them tax-free if you pay for the group insurance through payroll deductions.
If you pay for group disability insurance, how much are the premiums? Will the cost increase as you get older?
Does it have other benefits?
Partial disability benefits and cost of living adjustments strengthen the disability policy. Although they are not commonly found in group policies, they are vital to comprehensive long-term disability plans.
Should you buy an individual disability insurance policy?
You may conclude that your benefits are not very strong after reviewing your group disability coverage. In that case, you can buy an individual policy to supplement or replace the group plan. You may want to do so because:
An individual disability insurance policy has better coverage, features, and benefits.
You are not planning to stay with the employer long-term, especially if you will become self-employed.
You want more control over your long-term disability coverage with an individual policy.
Frequently Asked Questions
What is a group disability plan?
Group disability insurance is a benefit many employers offer in a group insurance package. It provides short and long-term disability coverage to employees to protect them from an injury or illness.
Is group disability insurance a taxable benefit?
If an employer pays for the group disability insurance, the monthly disability benefit is taxable. Employees who pay for coverage themselves will receive the benefit tax-free.
What happens after two years on LTD?
After two years on a long-term disability claim, the definition of a disability changes from own occupation to any occupation. This makes it harder to qualify for benefits.
Have A Question About Group Disability Insurance?
Are you a small business owner considering group disability insurance benefits for your employees? Or maybe you’re an employee wondering if your workplace disability policy is good enough.
Whatever the case, we have the knowledge to assist. We can help employees review their group disability insurance policies and help employers set up a group plan that fits their needs and budget. Contact us at info@briansoinsurance.com or 604-928-1628 for a no-obligation consultation today.
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