Many employers provide their employees with group long term disability insurance (LTD). While this is a nice benefit for employees, you should be aware of the pitfalls inherent in group LTD plans and how to shore those up. There are major differences between group and individual disability insurance plans, and a combination of the two usually provides the most comprehensive and cost effective coverage. Since your income is the most valuable tool you have for surviving, it makes sense to protect it with quality coverage and not rely on your employer-provided group coverage.
Group long-term disability insurance is usually provided at no cost by employers. It covers all employees of the company, and is not something that you can opt out of. So essentially, if you’re an employee of the company, you are covered. Typical LTD plans will provide a replacement of a percentage of the employee’s income, up to a certain monthly maximum. A common LTD plan would replace 60% of your income, up to $10,000 per month. An employee with a salary of $100,000 would receive $5,000 per month ($60,000 per year) under such a plan.
Group LTD plans have some inherent weaknesses, however, that you should be aware of:
Benefits are taxable
If the employer is paying the premiums for the coverage and not passing these on to the employee, then the benefits would be taxed if received. This means that the 60% replacement is not going to be 60% once taxes are deducted. An after-tax replacement amount of around 50% is more likely.
Not Own Occupation
Most group LTD plans do not have an “own occupation” definition of disability. Most plans will say that they will pay you for up to 2 years if you can’t do your own occupation AND you’re not doing something else. After 2 years, however, they will continue to pay only if you can’t do ANY occupation. This is not as good as a policy that says they will pay you if you can’t do your own occupation, regardless if you can do another. Many individual disability policies have the “own occupation” definition of disability.
Portability
Group LTD plans cover you when you are actively employed full-time (30 hours per week or more). However, once you leave your company, you are no longer covered under the plan. This can be a problem if you go to a new employer that doesn’t offer LTD coverage and you have a health condition that prevents you from buying an individual policy.
Social Security Offset
Group LTD policies almost always have a provision that offsets their benefits against anything you receive from Social Security Disability Insurance (SSDI). The problem here is that since SSDI benefits are often paid in lump sum, the disabled employee suddenly faces a demand from the LTD insurer for the payback of the amount of benefits provided by Social Security; monies most likely already long-spent. The inability to repay the LTD insurer can result in action by the insurer against the employee.
Your greatest asset is your ability to get up every day and earn an income. A 35-year-old employee making $100,000 per year will earn over $3,000,000 by the time they are ready to retire at age 65. Do you want to leave your $3,000,000 asset to the free coverage offered by your employer?
The Solution
The solution is to supplement the LTD at work with an individual disability insurance policy. An individual DI policy (IDI) will supplement the group LTD and will shore up many of the deficiencies listed above. A good quality IDI policy provides:
- Tax free benefits
- Coverage specific to your own occupation
- Portability – the policy is yours and goes with you from job to job
- No offsets against whatever you might receive from Social Security
- Other benefits, such as coverage for retirement savings are also common.
Using the same example salary above, you can see how an individual supplemental disability policy can provide some much needed income:
$100,000 salary = $8,333/month
60% LTD benefit when disabled – $8,333 x 60% = $5,000/month
After tax disability income (assuming 25% tax rate) = $3,750/month or $45,000/year
Supplemental individual DI policy – $2,000/month
Total after tax income when disabled – $3,750 + $2,000 = $5,750/month or $69,000/year
If we just take the above problem of the benefits being taxed, most people would have a hard time making ends meet.
$100,000 salary = $8,333/month
60% LTD benefit when disabled – $8,333 x 60% = $5,000/month
After tax disability income (assuming 25% tax rate) = $3,750/month or $45,000/year
That’s a 55% pay cut that most people wouldn’t be able to manage.
By supplementing your group LTD policy with an individual policy, you can not only enhance your income protection with coverage that is far superior in terms of quality, but you can also take your replacement level from approximately 55% to almost 70%. No disability insurance policy will replace 100% of your income, but 70% of your income on a tax free basis could be the difference between financial success or failure.
Request a free quote from us today, and talk with one of our disability insurance experts about how to shore up your coverage.
