Which is Better: Individual or Group Disability Insurance?

Most people insure their material possessions, including their homes and cars. But many of these same people don’t insure what is probably their most valuable asset: their ability to work and earn income. If you become sick or are injured and can’t work, will you be able to pay your bills and maintain your standard of living?

If you depend on your income to pay the bills, you need to seriously consider buying disability income insurance. Disability income insurance can help you pay your bills by replacing a substantial portion of your income. It can help you maintain your current lifestyle and help protect you and your family from going into serious debt.

The Drawbacks of Group Insurance

Are you covered by a group long term disability insurance plan at work? How likely is the policy to pay? Learn where the holes are in your coverage and why an individual disability insurance policy may be necessary to fully protect you and your family.

Millions of people are insured by group long term disability plans. However, there are drawbacks to this coverage and situations where the policies will not pay. Unfortunately, many group plans do not pay for the type of disability that is most likely to occur. Theoretically, you are covered. But are you?

Today, the average person will change jobs 7 times during their career. There is no assurance that each employer will offer a long term disability plan.

Cost

In general a group disability insurance policy is less expensive than an individual policy. Why? Often group policies are offered by your employer at no cost to you. Similarly, many employers offer group disability insurance as part of a benefits plan for which you can pay with pre-tax dollars. In general, with the risk spread over more participants, the cost of group disability is less.

However, group insurance premiums generally can increase as your company renews its coverage annually. Compare that to an individual policy’s monthly premium which always stays the same.

Benefits

One of the reasons the cost of group disability insurance is less is because benefits are often less as well. Group policies often take longer to begin paying benefits when you are disabled and the benefit payments may not last as long.

With a group policy, the amount of monthly benefit to which you are entitled can rise with your salary (as does the cost). With an individual policy, the benefit is set when the policy is issued and doesn’t change unless you have added automatic increases and/or a future purchase option.

Disabilities Defined

It is vital to understand what is meant by “disability” when comparing an individual and group disability insurance policy. Often, you must be 100 percent disabled and unable to perform your specific occupation to collect on a group disability policy. Individual policies often will pay on a percent of disability.

As an example, assume your maximum monthly disability payment on an individual policy is $5,000, and that you are confirmed as 60 percent disabled. Many group policies would pay nothing. Many individual policies would pay $3,000 a month, or 60 percent of the max.

Further, many group policies quit paying after a given time if you can’t work in your occupation but can work in another. Individual policies are more often broader, continuing to pay if you are disabled in your field, even if you work in another.

Partial Disability

This is the most important distinction because over 70% of the claims filed at insurance company home offices are for partial disability. The person is not completely unable to work. Their disability may only allow them to work a certain number of hours per day and their salary is adjusted downward accordingly.

An individual plan can pay a percentage of the total benefit that represents the percentage of income lost. For example, if a person making $5,000 a month with a $3,000 a month individual policy benefit loses 60% of their income due to a disability, the policy would pay 60% of $3,000 or $1,800. Most group plans do not pay for a partial disability.

Portability

As we have become a more mobile workforce, the portability of benefits is important. Group disability insurance usually terminates when your employment does.

An individual policy is yours and goes with you wherever you work.

Riders on Individual Disability Insurance Policies

Most insurers offer several optional benefits (called "riders") to enhance disability income coverage. Common riders include:

Cost of Living Adjustments. COLA provides for an annual increase in benefits (generally after you have been disabled for a year), usually based on a Consumer Price Index or a predetermined percentage. This helps your benefits keep pace with inflation, and is particularly important if you are disabled for a long time.

Future Purchase Option (Guaranteed Insurability Option). This rider allows you to purchase additional disability income insurance as your income increases, without providing proof of medical insurability. Even if you develop a condition that would normally prevent you from obtaining additional coverage after you purchase your original policy, you could still increase your benefits.

Residual Benefit. This pays you a portion of your monthly disability benefit if you have a drop in income due to a disability (e.g., if you are working part-time). In most cases you need to satisfy a minimum percentage loss in earnings (e.g., a 20 percent loss -- one day per week) to qualify.

Conclusion

You have seen that group long term disability income plans can be cancelled, premiums increased and lack portability. They posses no ability to protect an occupation and, most important, most do not pay for the type of claim most likely to occur: partial disability.

Individual disability insurance plans do not have these limitations. They generally cost more, but when it comes to disability coverage, you get what you pay for. If you get in an accident or develop a sickness that inhibits your ability to put food on the table, your thoughts are not focused on what the premium is for your disability income insurance coverage. You simply want to know when your disability check will arrive in the mail.