Disability Insurance
What is group disability insurance?
Group disability insurance is a single disability policy that covers many people (a group). The insured group has a common interest or association, such as an employer, a trade, or a school affiliation. All eligible individuals may be covered by the policy, and the cost of group coverage is often less expensive than the cost of individual coverage. The plan may be contributory (you must sign up for coverage and contribute toward the premium payments) or noncontributory (funded by the employer or association, and you are automatically covered if you meet eligibility requirements).
Who is eligible for coverage under a group disability policy?
To be eligible for coverage under a group disability plan, you must meet the following requirements:
You must be a member of the group
To be eligible for group disability coverage, you must be affiliated with, or be a member of, the group offering coverage.
Example(s): Pat’s boyfriend, Jamie, wanted to enroll her in the same disability insurance coverage that he purchased through the United Aviators, a trade association he belonged to. However, because Pat did not belong to the group herself and the contract allowed members to enroll only their spouses, Pat could not purchase the association’s disability coverage.
You must meet the eligibility requirements outlined in the group policy
Not all members of the group may be eligible for group coverage. Although a group plan cannot bar an individual from coverage, it can bar a group of individuals from coverage until certain eligibility criteria, such as length of employment, are met.
Example(s): Fred got a job as a bus driver. On his first day at work, he found out that he would be eligible for enrollment under a group disability plan but only after he had worked for the company for 90 days. Since Fred wanted disability insurance, he waited 90 days and then applied for coverage during the 30-day enrollment period that followed.
You must enroll in a contributory plan
If you are offered the opportunity to enroll in a contributory group disability plan, you must fill out and sign paperwork pertaining to the insurance contract. If you enroll during an open enrollment period, you won’t have to prove that you are insurable; in other words, you don’t have to show proof that you are healthy or take a physical. However, if you don’t enroll during an open enrollment period and later decide you want coverage, you may have to prove insurability at that point, or you may have to wait until the next open enrollment period.
How does it work?
A group disability policy is held by the master policyholder
When you apply for group disability insurance, you are not issued an individual policy, nor are you evaluated for coverage as an individual. Rather, the policy is issued to the organization or company that represents the group (the master policyholder). The individuals within the group that apply for disability insurance are issued certificates of coverage rather than individual policies. These certificates are proof that coverage exists, and they contain information about the amount and type of coverage provided.
You pay premiums directly to the master policyholder
Instead of paying premiums to the disability insurance company, you pay your premiums directly to the master policyholder (if this is your employer, often through payroll deduction). If you pay either part or all of your premium cost, your group plan is said to be contributory. If the master policyholder (your employer, for example) pays the entire premium cost, then the plan is said to be noncontributory. For the plan to remain in effect, most or all of the group’s members must want to be included and have coverage. If the plan is noncontributory, 100 percent of eligible group members must be covered by the plan. If the plan is contributory, then usually 75 percent or more of eligible members must be covered by the plan. When enrollment levels drop, then the group must find new participants from the eligible pool of members.
Caution: The taxation of your disability benefits depends upon who pays the premium cost of your group disability policy.
What benefits does a group disability policy provide?
Short-term disability benefits
If your employer offers disability insurance, it’s likely a short-term policy. Short-term disability insurance contracts usually have short elimination periods (3-14 days) and are simple to apply for. Although some offer benefits for up to two years, many policies pay benefits for six months to one year.
Long-term disability benefits
Long-term disability policies are offered less frequently by employers than short-term disability policies. You are more likely to find them offered at medium- to large-sized companies than at smaller ones. Most of these plans pay benefits up to age 65, although, in certain instances, they may pay lifetime benefits.
Strengths of group disability insurance
Less strict underwriting standards
Group disability policies often have fewer underwriting restrictions than individual disability policies. That’s because the risk of disability is borne by the group rather than by an individual. A fairly large group will include mostly individuals who are good risks, as well as a few individuals who are poor risks. Even though individuals enrolling in a group disability plan will not have to pass a physical exam, they will only have a limited enrollment period to take advantage of this provision. This helps to prevent individuals with health problems from enrolling after they have discovered that they are sick.
When Pat applied for an individual disability insurance policy, his insurance company asked him many questions about his health, his family medical history, and his habits. In addition, he was asked to take a physical before the insurance company could issue him coverage. When he applied for a group disability policy through his employer, however, Pat only had to fill out a simple application, and he was issued insurance without undergoing a physical.
Low-cost coverage
In general, group disability insurance premiums are much lower than premiums for individual disability insurance policies because it’s more cost-effective to underwrite insurance for a group than for individuals.
Tradeoffs of group disability insurance
Lack of portability
“You can’t take it with you” is a phrase that normally applies to group disability coverage. When you leave your job or otherwise terminate your relationship with a group, you can’t take your coverage with you. In addition, you normally cannot convert it to an individual disability policy. This means that you may be left without disability coverage when you need it, and if you develop a medical problem, you may be unable to buy coverage for that preexisting condition in the future.
Example(s): Sue was fired from her job as a flight attendant. As a result, her disability policy coverage from her employer was terminated. Three weeks later while job hunting, she found out that she had a serious liver disease, and she was hospitalized for a month. She finally found a new job, but her new employer did not offer disability coverage, and she was unable to buy an individual disability policy that covered her disease. When it flared up again six months later, Sue had no disability insurance to pay her bills while she recovered.
Tip: If you know you’re leaving your job, consider applying for individual disability coverage before you quit. Assuming you are insurable, this will ensure that there will be no lapses in your disability coverage.
Premiums can be raised
You can buy an individual disability insurance policy that guarantees that the premium you pay will remain the same for as long as you own the policy. Group disability insurance, however, normally does not offer this guarantee. Association policies usually offer term coverage that guarantees that the premium will not rise for that term. However, at the end of the term, you may find that you have to pay much more for coverage if you want to renew it (if the premium has been raised for the entire group).
Caution: If your employer pays the premium for your group disability coverage, then some or all of your benefits will be taxable when you receive them.
Note: Strict definition of disability–Unlike individual disability policies, most group policies sponsored by your employer only pay benefits if your injury or illness is not work-related (nonoccupational). This is because workers’ compensation covers many work-related disabilities. In addition, your employer-sponsored group disability policy is likely to define disability as any occupation disability. This means that if you are able to work in any occupation (even one outside of your own area of expertise), you won’t be eligible for disability benefits. Occasionally, however, group disability plans will incorporate the two definitions, paying benefits in the short term even if you are able to work in another occupation and paying long-term benefits only if you are completely disabled and unable to work in any occupation.
Benefit provisions
Group plans are not designed to meet the specific need of the individual. They may offer many of the same features as individual disability plans but are less flexible. You may be able to personalize your policy somewhat by adding on a rider or two, but you won’t end up with a policy that reflects your individual circumstances. Although both individual and group disability policies limit coverage to certain maximums based on income, group policies often do not consider deferred compensation, bonuses, and commissions when determining the maximum benefit payable. This might hurt you if your earnings are not truly reflected through your salary. In addition, long-term group disability benefits are usually offset by other government benefits, which is not necessarily the case with individual insurance.
Questions & Answers
How does long-term care insurance cover you if you become disabled?
Long-term care insurance is similar to long-term disability insurance but not the same. Long-term disability insurance pays benefits if you are unable to work and earn a living and your benefit is a certain percentage of your pre disability income. Long-term care insurance pays benefits if you suffer a debilitating accident or injury and you can’t care for yourself. The insurance is designed to pay for the high cost of at-home or nursing-home care. You choose your benefit level, based on the cost of care you anticipate. You may need both types of insurance to fully cover you in the event of a long-term disability.
