What You Should Know About Your Group LTD
“I have group disability LTD through my employer. I don’t need an individual policy.” This is one of the most common statements I hear from people who think they have coverage at work. While group coverage through an employer has its benefits, there are some very important reasons why you should consider purchasing supplemental disability insurance. Here are the top 9 reasons why you should consider purchasing an individual policy.
1. Definitions of Disability
Individual plans provide more comprehensive coverage. Typical group plans will have general definitions of disability and some will not allow for you to work in another occupation. Some group plans may only consider you disabled if you are unable to perform any occupation. Protecting your income should mean protecting your occupation, not any occupation for which you are qualified by education, training, or experience.
High quality individual policies will provide benefits if you are unable to work in your occupation. They will not limit or reduce benefits if you work in another occupation regardless of how much money you can earn. By purchasing a supplemental policy, you can provide yourself with the most comprehensive coverage available.
Most group policies are not portable, meaning you cannot take the coverage with you if you leave the employer. Individual policies can transfer from employer to employer and occupation to occupation. If you decide to start your own business or even change occupations, an individual policy stays with you and continues to provide protection no matter where you go. By purchasing a supplemental policy, you can ensure that you have some level of coverage should you decide to leave your current employer.
3. Taxability of Benefits
Since most group coverage is paid by the employer, any benefits you would receive would be subject to income taxes. This means that the actual benefits you would receive through a group plan would be substantially reduced because of taxes.
If you own a personal disability insurance policy, and pay the premiums with your own after-tax dollars, any benefits received during a claim are tax free.
4. Partial Disability Coverage
Group policies can provide varying levels of coverage when it comes to partial disabilities. Some group plans require you to be totally disabled before you can collect under a partial claim. Some group plans require you to be unable to work full-time or unable to perform some of your material duties in addition to having a loss of income. The strongest individual policies will consider you partially disabled as long as you can demonstrate a loss of income due to illness or injury.
By purchasing a supplemental policy, you are providing yourself with more comprehensive coverage that would provide benefits in more scenarios.
5. Protecting Medical Insurability4
One of the major benefits of supplementing a group policy with an individual plan is the ability to purchase a Future Purchase Option. This feature allows you to purchase additional coverage regardless of your medical insurability at the time. What happens if you decide to leave your employer but can’t medically qualify for individual coverage? If you had purchased a supplemental policy with a Future Purchase Option, you will be able to utilize that to buy more coverage regardless of your health.
6. What Income is Protected?
Group policies typically will provide a percentage of coverage, 50% or 60%, based on your salary. What most don’t realize is that this coverage may not cover bonuses or incentive compensation. For many people, this additional money can be a large portion of their annual salary. Individual policies will take into account bonus or incentive income at the time of underwriting.
Sales Manager earning $100,000 annually with a bonus of $125,000. Their group policy covers 60% of base salary up to $10,000.
Disability Benefits through Group Policy-$5000
The group policy would provide a $5000 taxable benefit should this person become disabled. Could this person maintain and continue paying their bills on roughly $36001 a month after taxes?
An individual policy could provide this person with an additional $76902 in tax free monthly benefit. Now, could this person maintain and continue paying their bills with $11,290 a month?
7. Inflation Protection5
Most group policies do not include protection for inflation. If you were to suffer a disability lasting many years, the benefits would not increase. By supplementing with an individual policy that includes the Cost of Living Adjustment Rider, you can help protect against inflation if a disability were to last many years.
8. Mental/Nervous Limitations
Most group policies will limit any claims resulting from mental/nervous conditions to a 24 month period. There are individual policies that would provide coverage for mental/nervous conditions up to the maximum benefit period.3 By supplementing with an individual policy you are expanding the potential coverage available in case of a mental/nervous disorder.
9. Non-Cancellable/Guaranteed Renewable
In most cases, your employer pays for your group disability coverage. What happens if they choose not to offer the coverage anymore? Individual policies are non-cancellable and guaranteed renewable which means that the insurance company cannot change or alter your policy at any time.
It also means that as long as you pay your premiums, the insurance company can never cancel your policy. Can you guarantee your employer will offer the coverage in 20 years? Can you guarantee they won’t make changes to the policy?
Having a group policy is not a bad thing. It is important to know what the limitations are on your group policy. I recently spoke with a client who told me a story about a co-worker of his and why he wanted to supplement his group policy. His friend had a brain aneurysm and became disabled.
He knew he had a LTD policy with his employer, what he didn’t know was that it only protected his salary and not his bonus and commissions. He lost his house, had to move in with his wife’s family, and is barely making ends meet. It was a wake up call to all his friends and colleagues. My client supplemented his group to protect all his income not just his base salary.
He was fortunate this did not happen to him. Know what you have and talk to someone about looking at the details of your group policy. You may one day need disability insurance and if you do you will be happy you looked at the details and you supplemented your group policy.
The information displayed on this page are the opinions and views of the author, and are not necessarily the opinions and views of The Guardian Life Insurance Company of America (Guardian), or any company that is an affiliate or subsidiary of Guardian.
1. Assuming 28% taxes.
2. Based on Guardian’s current issue and participation limits, 2014.
3. Subject to full medical underwriting.
4. Restrictions and limitations apply. While medical information is not required when exercising a future increase option, applications to exercise an increase option will be financially underwritten, taking into consideration both the applicant’s then current income, as well as all disability insurance which is then in force, or for which the insured has applied or is eligible to receive.
5. This optional rider does not necessarily protect against an increase in the cost of living.
Berkshire Life Insurance Company of America, Pittsfield, MA, underwrites and issues the disability insurance policy forms 1400, 1500 or 1600. Berkshire is a wholly owned stock subsidiary of The Guardian Life Insurance Company of America which is located in New York, NY. Policy forms 1400, 1500, or 1600 provide disability income insurance only. They do not offer major medical insurance, basic medical or basic hospital insurance as set forth by the New York State Insurance Dept. These policy forms have an expected benefit ratio of 50%. In New York only, policy forms 1400-F, 1500-F or 1600-F have an expected benefit ratio of 60%. Expected benefit ratio is the amount of future premiums the company predicts will be returned as benefits to the consumer when averaged over all the people who own this policy form. The availability of this policy series, optional riders and provisions, as well as features, may vary from state to state.
This web page is provided for informational purposes only and should not be considered tax or legal advice. Please contact your tax or legal advisor regarding the tax treatment of the policy and policy benefits. You should consult with your own independent tax and legal advisors regarding your particular set of facts and circumstances. The information provided is not intended or written to be used, and cannot be relied upon, to avoid penalties imposed under the Internal Revenue Code or state and local tax law provisions.
A person’s eligibility for benefits is determined on a case-by case basis, taking into consideration the factual circumstances presented as well as the terms and conditions of his/her policy(s).