What Is Group and Individual Disability Insurance?
Having an adequate income to sustain your family if you become ill or wounded and are unable to work for an extended period of time is a vital aspect of any financial plan.
This is referred to as a handicap. According to studies conducted by the Social Security Administration, one out of every four 20-year-olds will become disabled before retiring.
Most people recover from their disabilities and return to work, while some are compelled to work in lower-paying positions or may never work again.
When an insured becomes unable to work due to illness or injury, disability income insurance pays benefits to replace lost income.
Disability income insurance can be purchased as a group policy, such as through an employer or association that covers qualifying employees or members, or as individual plans that are issued directly to covered individuals.
Benefits from disability income insurance are often calculated based on an insured’s actual earnings from their occupation, with maximum benefits typically set at a percentage of their gross salary or wages.
- As a benefit, many firms provide group short and long-term disability coverage to their full-time employees.
- Individuals can also buy a disability income policy to augment a group plan or to provide coverage if a group plan is unavailable.
- Your group disability coverage is linked to your job. Because applicants are individually underwritten, individual disability policies normally have higher premiums but superior benefits.
- Exclusions that limit claims based on pre-existing conditions may be included in individual policies.
How Disability Income Insurance Works
Disabilities can cause a disruption in incomes and prevent people from maintaining their standards of living, paying their bills, or providing for their families. As many as 43% of individuals aged 40 will have a long-term disability by the time they turn 65.
Enrolling in a disability income insurance policy can help individuals mitigate any losses that stem from an illness or accident that leads to a short- or long-term disability.
DI insurance isn’t designed to guarantee 100% of your regular income. Instead, it intends to replace between 45% and 65% of your gross income. As noted above, most employers provide their employees with DI insurance benefits.
This type of program is referred to as group insurance coverage. Benefits are also available to insured individuals and their families through the Social Security Administration. Individuals may choose to purchase DI insurance to supplement existing coverage or if they don’t have any insurance at all.
You may have to pay taxes on your benefits if your employer pays for your DI insurance coverage.
Understanding Group vs. Individual Coverage
To help provide income in the event of disability, many employers offer their full-time employee’s group short and long-term disability coverage as a benefit. You can also purchase an individual disability income policy to either supplement a group plan or provide coverage if a group plan is unavailable.
There are many differences between group and individual coverage. Group disability coverage is tied to your employment. If you change or lose your job, the coverage is not portable.
The cost of group coverage can also change year to year. Individual disability policies usually have higher premiums, but offer better benefits because applicants are individually underwritten.
In contrast, group benefits cover all eligible employees, regardless of their health. Once issued, the language, benefits, and costs of an individual disability policy are contractually guaranteed, even if you change your occupation or employment.
Individual policies may also be issued with exclusions that limit claims that are due to pre-existing conditions.
Disability claims can be more complicated and frequently take more time to resolve than life insurance. Especially since most disability claims are due to illness or a condition that is not apparent—such as muscular, skeletal, or mental health problems—rather than an accident.
Here’s why. Higher paying, professional white-collar jobs tend to have better definitions than blue-collar jobs. And group policies tend to have weaker definitions than individual policies. The best definition of disability is when you cannot perform the duties of “your own occupation.”
However, some policies define disability as the inability to perform “any occupation.” This broader definition could place some policyholders at a disadvantage. It is also important to look at how long the own occupation definition lasts.
Some policies switch to any occupation after being on a claim for two to five years and if there is specific language about claims related to pre-existing conditions and mental or emotional issues.
Individual policies should be issued as non-cancelable and guaranteed renewable, which means the insurer cannot modify the policy once it is issued.
Policies may also allow for a gradual return to work, where an employee starts out part-time and continues to receive a partial benefit, or if you cannot perform the duties of your occupation, allows you to work in another occupation and still collect full benefits.
Unlike life insurance where if you are deceased the insurer automatically pays the claim, disability claims are more complex. This is why the terms and definitions in a disability policy are critical. The more precise the definition, the easier it will be to make a claim.
Group disability coverage is tied to your W-2 income or base salary. Benefits, bonuses, commissions, retirement plan contributions and incentives are typically not included. Individual policies are more liberal and sometimes offer a variety of compensation sources.
You are also buying a set amount of benefit, such as $5,000 a month, and may not have to document your income when going on a claim.
Group short-term (GSTD) benefits vary in the dollar amount paid, some pay 100% of earnings, and may begin immediately or after a short elimination period. Most group long-term (LTD) coverage has a 90-day elimination period, although individual policies do allow for a longer elimination period.
LTD disability benefits are usually limited to 50% to 60% of base salary and often have a maximum monthly benefit, regardless of how much you earn.
Some employers do offer the ability to buy additional coverage up to 70% of earnings or salary. If no additional coverage is available, you can buy an individual policy to supplement the group plan.
Individual policies offer higher monthly benefit limits and have the cost of living adjustments and future purchase options.
Integration With Other Benefits
Employer-provided long-term disability plans usually integrate benefits with Social Security Disability Insurance (SSDI). This means the group disability benefit you receive may be reduced dollar for dollar by other benefits received.
Individual long-term disability policies vary by company, and benefits may not be subject to a reduction if you receive SSDI.
The policy premium would be higher, but your combined income, if you become disabled, would be the combined benefits. Usually, individual plans covering blue-collar and high-risk occupations integrate with SSDI.
How Much Disability Insurance Do I Need?
It’s important to know how much income you need every month to pay your bills and where that income will come from. Here are some questions to think about:
- What kind of group and /or individual disability coverage do you have?
- How quickly can you reduce expenses?
- Do you maintain adequate cash reserves?
- Does your household have one or two incomes?
- Do you have other sources of income (rental property, investments, etc.)?
Nobody likes to think about becoming physically challenged. However, you need to protect your family’s financial security, and relying on SSDI or workers’ compensation benefits is not a great strategy since many claims are denied. Even if you are eligible, it may take months before you begin receiving benefits.
Do all disability income policies provide coverage for losses due to sickness and accidents?
No. Some policies only cover disabilities from accidental injury. Make sure to read your policy and know what is and what is not covered.
When I apply for insurance, what information will I be asked to provide?
To determine your eligibility, companies frequently ask for medical and personal information.
Does the Department of Insurance set premium rates and determine how much companies can charge?
No. The North Carolina Department of Insurance does not have the authority to set rates. However, carriers are required to justify their rates and demonstrate that they are actuarially sound and not unfairly discriminatory.
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