Life is full of uncertainties. As you begin your career journey and progress through adulthood, you may have some thoughts or anxieties about what would happen if you were to become sick or injured. If your condition makes it so that you cannot work for an extended period of time, this is considered a disability. If this were to happen to you, you’ll want to make sure that you have enough income to support yourself or your family.
Statistics show that a 30-year-old person is four times as likely to become disabled than to die before age 65. About 90% of disabilities are due to illness, not injury. Most of the time, people recover from disability and return to work, but some people are forced to take different jobs with lower incomes as a result of long-term injury or illness. With these facts in mind, it’s important to be sure you have enough coverage.
In this article, we’ll explore group disability insurance coverage, its potential limitations, and how to determine if it meets your needs or if supplemental insurance might be necessary.
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Group Disability Insurance
Group disability insurance is a common workplace perk. There are many benefits to acquiring disability insurance in this way. It’s usually much less expensive than it would be if you were to purchase coverage on your own. While this type of insurance is convenient and accessible through your employer, its effectiveness can vary greatly depending on your individual circumstances.
Group disability policies typically pay up to 60% of base salary with a maximum cap but since payout is based on base salary, bonuses and commission income aren’t included in the calculation. The premiums are usually paid by the employer, which is a plus, but it also means that benefits are taxable to the employee. On the con side, group disability policies usually have more conditions on when they will pay out benefits. An example of this is the policy may pay for only two years if you can’t perform a specialty aspect of your job; then after two years, it only pays if you can’t do any job at all.
Something else to note is that benefits from these policies are offset by other disability benefits such as Social Security or workers compensation insurance. These are typically called “Offset provisions” in the text of the policy. Usually, a medical exam or other proof of health is not required if you apply within 30 days of your hire date. Of course, since the policy is tied to your employer, these policies are not portable. If you change jobs or employers, you can’t take the policy with you.
Individual Disability Policies
Of course, if disability insurance isn’t available through your employer or you want to explore other options, you can purchase an individual disability policy. Here’s a quick breakdown of the common features of individual disability policies.
Usually, these policies can cover up to 100% of your earnings, including bonuses and commissions. That’s far higher than the group maximum of 60ish percent. Since the premiums are paid by you, not your employer, any benefits you receive are income tax-free. These policies typically offer the most beneficial definitions of disability and are portable: you can take them with you even if you change jobs. Also, these policies are typically “Guaranteed renewable,” meaning they will continue to stay active unless you stop paying the premium. They’re also not reduced by other income received during the claim e.g., Social Security.
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One thing to note is that these policies do usually require a medical exam. The premiums you will have to pay depend on the results of the exam, so if you have any pre-existing health issues (or perhaps just some unhealthy lifestyle choices), you could end up paying a lot for your coverage.
A Professional Opinion for Your Specific Situation
As you can see, there are pros and cons to each type of policy. Some people will take advantage of their employer-offered group policy then purchase an individual policy to fill in the gaps. For those with highly specialized skills such as physicians or medical professionals, a group policy with coverage for only two years that won’t pay out if any job can be performed may not be adequate coverage for you. You should look into an individual disability policy that can be tailored to your financial needs.
Determining if your group disability insurance is enough for your specific situation requires a closer look at your coverage and insurance options. The adequacy of your current plan can be influenced by various factors including your age, health, job dependence and personal financial situation.
Whichever you choose, it’s important to consider having disability insurance. This will help ensure that you’re covered for income replacement should a disability occur. To get a clear picture, it can be beneficial to consult with fiduciary financial advisors or a financial planning firm.
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