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Being an employee has many perks—overtime, bonus, vacation pay. One of the most valuable perks is an employer-sponsored group benefits package. That’s because it often contains long and short-term disability insurance coverage.
But did you know that disability income insurance from your group plan can’t fully protect your income?
In this post, we explain the shortcomings of group long-term disability insurance. We’ll also share how you can supplement group disability insurance with individual coverage for the best protection.
What Is Group Disability Insurance?
Employers often offer group disability insurance to employees as part of their benefits plan. Some employers pay for the group plan themselves, while others share the costs with employees. Whatever the case, group disability coverage provides a recurring benefit if you’re unable to work due to a bodily injury or illness. This benefit helps protect your income so you can focus on recovery.
Besides disability insurance, you may also see life insurance and health and dental insurance. Because the employer often pays these benefits, staff highly value group policies.
Within the group plan, you’ll see two types of disability coverage: short-term disability and long-term disability insurance. Let’s take a look at each of them in detail.
Short-term disability insurance
As its name suggests, short-term disability insurance covers you for a short period. It pays you a weekly indemnity while you’re disabled because of a bodily injury or illness. The amount you get depends on your income but usually ranges from 40% to 75% of your weekly income.
Benefits start after a short elimination period which lasts from zero to 14 days. In total, you’ll receive short-term benefits for up to 26 weeks.
Because many disabilities last much longer than this, short-term disability insurance is not sufficient to protect your income. That’s where long-term disability insurance comes in.
Long-term disability insurance
Long-term disability coverage kicks in right after your short-term disability benefits stop. Instead of weekly payments, you receive a monthly income from the insurance company.
How much disability insurance you get depends on your salary. Typically, group disability coverage will pay you between 50% to 75% of your monthly income. However, be aware that there is a maximum benefit amount.
For example, say your group LTD has a maximum monthly benefit of $3,000. If the disability coverage indicates employees receive 75% of earnings and your monthly income is $5,000, the most you will get is $3,000, not $3,750 ($5,000 x 75%).
Once you’re on a claim after an elimination period of four to six months, you will receive payments for at least two years. That is the shortest benefit period, although benefit periods of five years and up to age 65 are standard as well.
Why You Can't Rely On Group Disability Benefits
Both short and long-term disability coverage sounds pretty good, right? Why would you still need supplemental disability insurance? Wouldn’t the coverage be redundant? In most cases, no. Here are seven reasons why.
Low payout
Most group policies cap your monthly benefit. While employees with lower salaries might not notice the difference, high-income earners definitely will.
Using the example from the previous section, what if your monthly income was $10,000 instead of $5,000? In that case, $3,000/month in benefits represents only 30% of your income, which is not nearly enough as income replacement.
Exclusions from earnings
Many jobs have a low base salary but include high commissions and bonuses. When dealing with group LTD, only the base salary is included in calculating your benefits.
Whether you work a bunch of overtime, get rewarded with a year-end bonus, or generate hefty commissions on your sales, none of these earnings counts when determining your monthly benefits.
Taxable benefits
With group policies that are 100% employer-paid, the claim payout you receive is taxable. While not having the out-of-pocket expense is great, your income replacement benefits might not be enough to cover your expenses after deducting for tax.
Lack of features
A group plan is standardized among all workers. The employer chooses the plan design, giving the employee no choice for optional benefits, called riders. These disability insurance riders enhance your protection at a small cost.
For example, the cost of living rider increases the monthly benefit by inflation every year. Another crucial benefit is the partial disability rider, which pays a reduced amount if you’re partially disabled. You’re unlikely to find these riders on your group plan.
Any occupation after two years
Did you know that the definition of a disability changes after two years in a claim? Instead of measuring your ability to work in your own occupation, you’ll also have to show that you can’t work in any gainful occupation.
What is considered a gainful occupation? It’s one where you are qualified based on your experience, education, and training. For example, say your job requires a high degree of skill with your hands. If you lose your ability to use your hands but can still teach, the insurance company may cut off your benefits because you can work in a new occupation.
Coverage is not portable
What if you decide to change employers? Your group plan won’t go with you, so if your new employer doesn’t have good benefits, you’re left without protection.
Employer can reduce or cancel coverage
Group benefits are about balancing the needs of the employees with the plan’s costs. If the price increases due to rising claims, your employer may consider reducing coverage or removing it from the benefits package entirely.
While it may seem drastic, employers need to ensure the long-term sustainability of the benefits package. As a result, don’t be surprised to see disability coverage drop in the future.
How You Can Supplement Your Group Coverage
Although the cons of a group plan may be frightening, you’re not out of options. In fact, the best way to shore up those disadvantages is with an individual disability insurance policy. Unlike your employer-sponsored plan, you own this individual coverage, so you call the shots.
Also called supplemental disability insurance, an individual disability income policy addresses all the concerns in the previous section. Here is how individual coverage through a private company helps.
Higher payout
Because you own the policy, you choose the benefit amount. If you make $10,000/month, you can buy up to $5,925/month in benefits. By replacing almost 60% of your income, your supplemental disability insurance policy covers more of your expenses.
Calculating earnings
You can include all types of earned income to calculate how much disability insurance you can buy. This includes salary, bonus, commission, and overtime. As long as you report it on your tax return, you can use it to determine your disability coverage.
Tax-free benefits
One of the advantages of an individual disability income policy is that the insurance company pays you the benefits tax-free.
Customize your coverage
With an individual disability policy, you choose the benefit amount, elimination period, benefit period, and optional riders. For example, you can buy the cost of living adjustment and partial disability riders if they fit your budget.
Regular occupation
Unlike group long-term disability insurance, individual plans let you extend the regular occupation period to age 65. What does that mean? Simply put, the insurance company won’t test your ability to work in any gainful occupation after two years of a claim. Instead, it will continue to pay you benefits as long as you can’t do your job.
Coverage stays with you
With an individual disability policy, your coverage goes where you go. Whether you decide to change employers, become self-employed, or take a break from work, you won’t have to worry about long-term disability coverage.
Coverage is guaranteed
Can the insurance company reduce or cancel your policy? Not with the best individual disability policies. These policies are non-cancellable and guaranteed renewable. This means that once your individual coverage is in force, the insurance company can’t reduce your benefits, cancel your coverage, or increase your premiums.
Only you can change or cancel your individual disability insurance policy, putting you in complete control.
Frequently Asked Questions
What is supplemental disability insurance?
Supplemental disability insurance is an individual disability policy you buy to complement your group plan. Because of the limitations of group LTD, it’s vital to have supplemental disability insurance.
Is supplemental disability worth it?
While individual policies from a private company will cost more than employer-sponsored coverage, the benefits they provide are much better at protecting your financial plan from a disability.
An individual disability policy costs between 1-3% of your annual income. Insurers also offer a 10% discount if you have coverage through work. As a small price to protect your income, supplemental disability insurance is well worth it.
What is group disability income insurance?
Group disability insurance is income protection offered by your employer. The two main parts of it are long and short-term disability insurance. Combined, they protect your financial plan from income loss while you recover from a disability caused by an illness or injury.
Have Questions About Group LTD?
If you have benefits through work, you’ll want to know if you need to supplement the coverage. Therefore, the first thing to do is dig up your benefits booklet. It will show you details about your disability coverage, including the amount and elimination period.
Next, decide if you should buy additional coverage to top-up the group LTD or if you should ignore it when designing your personal disability insurance policy. Finally, get some quotes to make sure the premiums fit your budget.
If you feel lost about the whole process, contact us for help. We’ll review your existing coverage and help you find a disability policy that fits your need. Contact us at info@briansoinsurance.com or 604-928-1628 for a complimentary consultation and quotation. We’ve helped many Canadians get the right disability insurance policy.
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While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
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