It's around that time of year where your employer is having open enrollment, a period where you can choose which benefits you would like to receive for the upcoming year. It's pretty standard for employers to give some insights on how to choose a 401(k) investment or a health insurance plan, but two areas often left out are group life insurance and group disability policies. How do you know how much coverage is enough? Or whether or not you need to supplement what you have at work with an individual policy? Let's dig into these topics, starting with the ins and outs of group disability insurance, so you can know how to choose the right plan for you and your family.
What Is Disability Insurance?
To put it simply, disability insurance is paycheck insurance. It is designed to replace a percentage of your income if you can't work as a result of an injury or illness. A typical disability policy replaces 60% to 70% of your pay if you're considered totally disabled. There is short-term disability insurance, which can range from a few months to a year, and long-term disability insurance, which in some cases will pay until you reach 67 or 70 years old.
How Does Group Disability Insurance Work?
While the pricing and availability of individual disability insurance can be based on a variety of factors (e.g. age, medical history, unearned income,etc.), group disability insurance might require a much smaller amount of information (e.g. age, gender, smoker or nonsmoker). Because a large group of people are purchasing the coverage, insurers often price group insurance much lower than individual policies, and some employers will pay the premiums for you completely. That being said, group policies could also have reduced benefits that must be understood when deciding whether or not it meets your needs.
So ... how do you figure this stuff out? Here's some information to know when reviewing your group disability policy.
What Is The Definition of Total Disability ...
A grouppolicy's definition of total disability is a description of the state you must be in to receive your full benefit. Reading this definition is extremely important because it lets you know how likely or unlikely you are to receive a claim. For example, one company might only consider you disabled if you cannot perform the duties of your job AND are not working in any other job. It doesn't matter if the new job is in a different profession, or for lower pay, or for fewer hours; if you are working, you're not disabled. A policy that considers you totally disabled as long as you cannot perform the tasks of your occupation, even if you ARE able to work in another occupation, is a stronger definition. To take it even further, you may be a specialist in field with many subcategories, such as a surgical nurse or a mechanical engineer, with each subcategory requiring a different set of physical and mental capabilities. A strong policy will treat your SPECIALTY as the occupation from which you are disabled. This would mean a surgical nurse would be disabled if they can't perform in the operating room, even if they can manage another form of nursing. They could be paid from their new job and STILL receive benefits from their pay as a surgical nurse! A policy without this protection obviously wouldn't be as strong, which is why you must read and thoroughly understand your work policy's definition of total disability.
... And How Long Does That Definition Last?
There are two areas in disability policies where the length of time is an important consideration. First, the benefit period, meaning the length of time your policy will pay benefits if you are disabled. A benefit period To Age 65 would pay benefits to a totally disabled policyholder until their age 65, while a 10 year benefit period would pay 10 years' worth of benefits per disability. The question here is whether or not the benefit period offered by your work policy is long enough. The second area that must be addressed is whether or not the definition of total disability changes over time. As we mentioned in the previous section, different policies will or won't consider you disabled based on whether you're working in your occupation, or whether you're able to work at all. Disability policies that cover you if you can't perform your specific job may limit that coverage to a certain period of time. For example, a group disability policy may state that you are considered totally disabled if you can't perform the tasks of your occupation - even if you are working in another occupation - for a period of 5 years. After that 5 years, it may only consider you disabled if you can't work AT ALL. Understanding how time affects the definition of disability is key if you are to truly compare the benefits of your group policy to what you would receive in the individual marketplace.
Is The Policy Portable?
Portability in insurance is the ability to take your coverage with you if you leave the employer. No matter how robust the benefit, a policy that isn't portable - and many group plans are not - has a number of risks. Let's say you leave your job for another job that also offers group disability coverage, but you're ineligible for benefits in the first 90 days. If you were to become disabled before acquiring the group coverage, you would have no protection. Even worse, if you leave to start your own company or to an employer that doesn't offer this benefit, you would have to apply for your own coverage. This wrinkle brings your age and health into the equation. Group coverage is often guaranteed-issue, meaning you are offered coverage regardless of previous medical concerns. Individual insurance takes into consideration your age, current health, and PAST health. If you've had or are having a health scare that would make obtaining coverage difficult or even impossible, depending on group coverage for 100% of your needs could backfire. We've unfortunately seen this with clients who leave a corporate job later in their career to start their own business. At that point, previous health issues might prevent them from qualifying for coverage. Had they put in place some level of individual coverage while working for their previous employer, it could have been used when they struck out on their own.
Will I Owe Taxes On My Disability Benefits?
There is no escaping the tax man, even when it comes to insurance. This simple rule can help determine whether or not your life or disability benefits would be taxable when received. If YOU pay for group coverage with your own money, any benefits you receive are tax-free. Why? Because you paid your taxes on the front end. Have your employer pay for all or part of your coverage, however, and whatever percentage they pay will be taxable as a benefit. A person whose employer pays 50% of their group disability premiums can expect 50% of any benefits to be taxable. Be sure to consider this in your calculations when deciding on not only the amount of group insurance to accept, but also how much is needed elsewhere as a supplement.
How Is My Coverage Affected By My High Salary?
High-income earners are often the victims of reverse-discrimination when it comes to workplace benefits. There are caps placed on things like 401(k)s that can mean they are unable to put aside as large a percentage of their incomes as lower salaried workers, for example. Health benefits can be affected as well, especially disability insurance. We mentioned that disability insurance covers 60%-70% of your pay in the event of a disability. It is not uncommon, however, for group policies to place a cap on how much money they will pay out each month. For example, if you make $150,000/year, a disability policy that replaces 60% of your salary would offer a benefit of $90,000/year, or $7,500/month. But if you read your benefits guide, you might find that your work policy replaces 60% of your pay as long as it does not exceed $5,000/month. This cap means that in the event of a disability, your work plan would max out its benefits at $5,000/month, far short of the $7,500 you might be expecting. If you're a high-income earner, check the fine print of your benefits guide or talk to an HR representative to see if there are limits on the monthly benefits for your group policy. If a significant and needed portion of your income is uncovered, additional individual coverage could fill the gap.
Does My Work Policy Cover Overtime and Bonuses?
if you're heavily dependent on bonuses, individual coverage can supplement group coverage in some pretty important ways. Group disability coverage often protects only salary and base pay. For example, if you typically earn around $60,000, but only $20,000 of that is salary and the rest bonuses, a group policy might only cover the $20,000 salary should you become disabled. It is not uncommon for commissions to make up the majority of the income of salesmen and women, which could mean large portions of their pay aren't protected by group policies. For hourly workers, group policies could leave overtime pay uncovered as well. Additionally, some companies allow you to cash out your PTO at the end of the year, an amount that is also typically excluded. If any of these scenarios apply to you, ask a financial advisor for help reviewing your options for individual coverage.