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What is the Difference Between Group and Individual Disability Insurance?

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When you compare group disability to individual disability there is no doubt that individual is better. It will be more likely to be there when you need it. Does this mean you should cancel or opt out of your companies group disability plan. The answer is no. You should likely stay in your group plan and take advantage of whatever benefits your company pays for. However, you should understand how that group disability benefit works. You may want to consider maximizing your coverage by purchasing an additional individual disability policy (get a supplemental quote here).  Below are some of the major differences between group and individual disability contracts.

Amount of coverage offered?

First thing you can look at when comparing group vs. individual is simply the amount of coverage being offered.  A group insurance benefit amount is usually a percentage of your base income to a maximum benefit amount. (60% of your base income to a maximum of $4,000 per month) While the benefits of individual coverage is also limited to a percentage of your income the maximum offered benefits are typically much higher then group contracts.  If you have group coverage at work you should consider purchasing an additional individual policy.

Can you get it?

Most group disability polices are offered on a guaranteed issue plan and do not require you do be health underwritten.  However, individual disability policies are almost always underwritten.  Some people will not qualify for an individual disability policy. You can read more about the underwriting guidelines and what medical conditions may prevent you from buying a disability policy, in the section: Can I Buy Disability Insurance If I Have A Medical Issue?

The difference is in the words: 

All disability polices are only as good as the words they are made up of.  The most important wording in a disability contractor is the definition of total disability. This is the definition that determines if you are totally disabled and will decide if you can collect the entire monthly benefit of your policy or not. The best definition is an “own occupation” definition. This definition usually reads something like this: “If you are unable to do the substantial and material duties of your job / occupation due to a sickness or injury you are considered totally disabled.” Not all policies have this strong wording and you must read your policy carefully. It is common to have some strong wording in your policy but also have additional wording which may make it worse at the same time. For example the definition of total disability could read like this: “If you are unable to do the substantial and material duties of your job / occupation due to sickness or injury and are not able or engaged in another occupation you are considered totally disabled.”  The additional words in this definition of total disability could prevent you from being able to collect benefits.

The next wording worth looking at is the residual or partial definitions. This is the part of the policy that will pay you a proportionate monthly benefit if your partially disabled. Your policy may pay if you can only go to work part time or you go to work full time but cant complete all the same functionality within your job. This would need to be caused from a sickness or injury. The policy should pay you a percentage of your benefits based on the percentage loss of your income. It is common for the benefits to be different from policy to policy and from individual to group. What you are looking for is, how much income you need to lose to start this benefit and how long will the benefit pay for. Some polices will only pay benefits for 6 months or 1 year while others can pay to age 65. This could amount to be a big difference.

Individual polices usually offer other features which group polices don’t. These vary based on which individual product and company your looking at. Product features and more can be found in the article section: What should I look for in a disability policy?

Taxes: 

Group disability benefits are usually taxable. When your employer pays for a group disability policy they are taking a tax deduction on the premium. This in turns makes any benefit you collect income taxable to you. The income tax bill you will have to pay will reduce the total group disability insurance benefit you will receive.  Individual disability benefits are 100% tax-free when the premiums are paid with after tax dollars.

Portability:

Group disability polices are not portable. If you work at ABC Company and they offer you a group disability policy, this policy will no longer be active once you are not employed at this company. If you leave ABC Company to go work somewhere else, if you are fired or quit; the group disability benefits are no longer available. Any claim that begins after this happens will not be payable because your policy is no longer active. Individual disability polices are portable and will remain active no matter what company you work for and even if you are not currently working. The lack of portability of group disability plans comes in two parts. The first is the most obvious one, which is that you might lose your group benefit and have no coverage when you need it. The second part is that you may not be able to replace it. Your new employer may not offer a group disability policy or offer the same level of benefits.  You may be thinking that you will just buy an individual disability policy then. However purchasing an individual policy at an older age will cost more and you may not be as insurable as you are right now. You could end up with no disability insurance at all. Unfortunately not being able to purchase disability coverage happens to often.

Non-Cancelable and Guaranteed Renewable:

What does this mean non-cancelable and guaranteed renewable? Not something you may have heard of before.  These are both terms in a disability contract. They allow you to automatically renew your policy each year by simply paying your premium. It also stops the insurance company from changing any terms within your policy. When insurance companies issue group disability contracts to employees the contract is usually not non-cancelable and also are not guaranteed renewable. That’s right the insurance company that offers your group disability can change the policy definitions, charge more premium, or even cancel the policy all together.  Most insurance companies don’t cancel coverage however premium increases and policy changes take place all the time. Sometimes these changes are made by insurance companies while other times it could be changed by your employer.  The bottom line here is that group disability polices are not guaranteed to be the same in the future. Both the benefits and cost can be changed and can even be taken away from you. Individual polices are almost always renewable and many are non-cancelable. You can read more about these features in the section: What Should I Look For In A Disability Insurance Policy?

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