Broker Check

Group Long Term Disability Insurance Vs. Individual Disability Insurance

November 05, 2019

Many Americans first learn of Disability Insurance while reading their benefits books at their first job. At first glance and with false assumption, the individual believes “my employer provides disability insurance; I’m all taken care of.” It is not until one has a personal experience or witnesses an experience that they begin to investigate further. The following paragraphs will provide additional education and information concerning the difference between a group-sponsored plan and an individual contract. The differences are stark and can prevent you and your family from financial catastrophe.

The Limitations of Group Insurance

Group Long Term Disability is a valuable employee benefit. For some experiencing health conditions it may be the only way they will have access to an affordable plan. Since it is an employer benefit, the company is the policy holder and the employee owns a certificate. This means the rates are often annually renewable and the policy is not portable, should the employee choose to leave.

If the policy is being paid with “pre” tax dollars, the benefit amount will be taxable to the insured upon receipt. Since most Employer Plans are insuring a group of people, the definition of “disability” tends to be restrictive and limits to a “total disability.” Many plans put a maximum cap on the amount of Group LTD coverage one can have and cover an employee’s salary only. Again, Group Long Term Disability is a great benefit if offered to you; however, please don’t fall into the trap “I’m all taken care of.”

How Individual Insurance Differs

Individual Contracts are the cornerstone to a proper risk management plan. The largest asset you possess is the ability to earn an income, so it is essential that it is properly protected. Just as it sounds, an individual contract is owned by the policy owner and since it is typically paid with after-tax dollars, it offers a tax-free benefit. Since the employee is the owner of the contract and funding premiums for it, the policy is portable and can be taken from employer to employer, if the insured chooses to change jobs.

The definition of “disability” ranges by carrier and it can be from True Own Occupation coverage to any occupation. This means depending on the contract, you might still be able to earn a lesser income while claiming on your policy. Since the insurance carriers are insuring one individual per contract, the monthly benefits can be larger. To be clear, your group disability coverage is taken into consideration by the underwriter. However, you are allowed to protect a larger percentage of your net income.

Individual disability contracts do offer a variety of riders such as Cost of Living Adjustment (COLA), Guaranteed Purchase Option, Partial Disability Claims, Student Loan Protection, and Retirement Contribution Funding. Lastly, a good individual contract will lock in your premiums for the life of the contract. As you can see, it is very important to work with a knowledgeable financial professional when considering disability insurance for oneself.

Each Person is Different

Group Long Term Disability is a tremendous benefit, if your employer makes it available to you. It is not the only solution when designing your long-term risk management plan. Given the complex marketplace, it is essential to work with a quality financial professional who can help educate and inform you on the details of the right individual policy for you.

Registered Representative. Securities offered through Cambridge Investment Research Inc., a Broker/Dealer, Member FINRASIPC. Investment Advisor Representative. Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. New South Wealth Management and Cambridge are not affiliated.