When Your Employer's Group Disability Policy Might Not Cut It

Mar 26 2014, 12:29pm CDT | by

When Your Employer's Group Disability Policy Might Not Cut It
Photo Credit: Forbes Business

Once you sign up for your company’s group disability insurance, you may be tempted to cross it off your to-do list and forget about it.  However, there are cases where having a group policy may not be enough. Getting a supplemental policy to fill in the gaps could be critical to protecting your retirement plans if a long-term disability hits.

 A group disability policy has its advantages, of course.

First, it’s convenient. Your company does most of the legwork and selects a policy for its employees. Employers either provide it as a free benefit or a voluntary benefit that you pay for through payroll deduction, which makes it easy for employees to get basic coverage. Group policies are often “guaranteed issued” for all employees of the company—usually, employees can enroll upon being hired without submitting to a medical exam or answering any health-related questions. For someone with health issues who wouldn’t qualify for—or couldn’t afford—an individual policy, a group policy is a valuable benefit.

There are still instances where a group policy falls short, and it may be a better bet to supplement with your own individual policy. Here are three:

1) The definition of disability may limit your benefits.

How does your policy define disability? Is it not being able to perform the duties of your “own occupation,” “gainful occupation” or “any occupation?”

The definition makes a big difference. The best disability policy replaces a percentage of your salary (usually somewhere around 60% or close to 70%) for the benefit period of the policy (often 5 or 10 years, or until age 65 or 67) up to a maximum salary cap (such as $5,000/mo) if you cannot perform your own occupation. Take, for example, a pianist with a career-ending hand injury who has a disability policy with an “own occupation” definition. The disability policy would pay a monthly benefit for the length of the benefit period because he couldn’t perform his regular occupation—playing the piano.

Some policies have definitions that change. Group policies often start with an “own occupation” definition for the first two years of the disability benefit period, and then shift to “gainful occupation” or “reasonable occupation.”  In this example, our injured pianist would need to seek a position in music or a related field that didn’t involve the use of his hand (I assume he’d have to scratch teaching off the list.)  If he is able to perform any meaningful work that he’s qualified to do that replaces somewhere between 60% to 80% of earnings, he might not qualify for further disability benefits.

With this type of group policy, if our 40-year-old pianist made $50K per year and had a hand-crushing injury, the policy would pay out about $2,900 a month for two years (using a 70% of gross salary benefit). After that, the policy type would shift to “gainful occupation.” From age 42 to 67, the pianist would miss out on about $870,000, because he would presumably be able to obtain “gainful employment” that didn’t require the use of his injured hand.  Granted, he’d have income from whatever employment he engaged in but it still could fall well short of what he could have earned from his job (pre-injury) or received from an “own-occ” disability policy.

You can calculate your own earned income equivalent at www.disabilityhappens.org.

2) When your employer pays the premium, the monthly disability benefit is taxable to you.

When you pay the premium, the monthly disability benefit is tax-free. This might seem like a minor point, since if your employer covers the premium, you are getting a free benefit. However, if you are in a high tax bracket or live in a state with high taxes, it might be better to pay the premiums yourself.

Here is an example. A couple living in California earns $160K per year—$80,000 each. They need both incomes to pay their mortgage and cover household expenses. Then the wife becomes disabled. Her gross income was $6,667 per month, and her disability benefit at 70% of salary is $4,667 per month. That sounds perfectly doable, until the I.R.S. and the State of California could tax the disability income at rates of 25% and 9.3%, respectively.

Disability will only pay about 60% – 70% of income in the first place, and then, because the benefit is taxable, it can be reduced by an additional third.  An employee with an employer paid group plan who is concerned taxes may eat into future benefits may consider getting an individual policy to supplement or “layer” on top of the group disability benefit to fill in the gap that income taxes may leave. (*This is not tax advice. Check with your tax advisor on any tax related issues.) 

Resource – LifeHappens.org

3) Employer-sponsored group policies usually aren’t portable.

As I mentioned earlier, one key advantage of a group policy is that it is often “guaranteed issue.” At first enrollment, for many group policies, there is no underwriting, so someone who normally wouldn’t qualify because of health problems could still get a policy.

Unfortunately, many times group disability isn’t portable, so if you left your job for a better opportunity, you’d lose your coverage. Your new employer might not offer disability insurance. So while you are healthy, consider putting your own individual policy in place.

Resource – Council for Disability Awareness – DisabilityCanHappen.org

If you’re not sure whether it would be better for you to take out an individual policy, review what you have through your job—it’s easy to do. Check the policy type (own occupation or gainful occupation), if and when it changes, the maximum monthly benefit amount, and the length of the benefit period. Review the salary definitions to see if your group policy includes commissions and bonuses. Also look at your paycheck stub to see if you are paying monthly premiums by payroll deduction.

If you don’t like what you see, consider getting an individual policy even if you’re on a group plan.

Ten Steps To Get Your Retirement Back On Track

Nancy L. Anderson, CFP ™ is a Certified Financial Planner ™ professional in Park City, Utah and a blogger for Deer Valley Ski Resort.  Follow Nancy on FacebookTwitter

Source: Forbes Business

 
 

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