Disability insurance can be very helpful if you get in the situation where you can’t work for an extended period of time. If an injury or illness prevents you from earning an income, disability insurance may become a crucial part of your financial plan.
While people often think about individual disability insurance, group coverage represents an alternative option that has become common among businesses. This type of insurance carries its own costs, benefits, and particular considerations.
Read below to find out what is group disability insurance, how it works, and what are its benefits and downsides.
Group disability income insurance definition would be an insurance plan for income protection that covers several people. Companies offer these benefit plans to their employees rather than the employees pursuing the insurance policy themselves.
In essence, when a business offers this type of insurance, employees have an opportunity to add another potential benefit to their 401(k), health insurance, and vacation benefits. It’s worth noting that group disability income insurance and individual insurance of the same type aren’t mutually exclusive. One employee can hold both policies simultaneously.
Group disability insurance is available in two plans – short term and long term. The most significant difference between the two is the duration, but other conditions may also vary.
One aspect of this insurance type is particularly important. The chosen plan maintains equal benefits and premium costs regardless of the positions individual employees hold within the company. Furthermore, different habits, lifestyle choices, and health history won’t make a difference concerning the coverage.
When it comes to group disability insurance for small business, it’s worth noting that companies with fewer than 10 employees might not be eligible for this type of coverage. Of course, this rule isn’t set in stone and different insurance carriers might have a lower or higher threshold.
The ability to purchase and offer group disability insurance isn’t exclusive to employers. Certain groups and organizations based on membership can be eligible, as well. For instance, professional organizations, guilds, and labor unions can purchase group policies for their members.
Crucially, group disability income insurance is tied to employment or group membership rather than the individual. If you stop being a member of the particular company or group that purchased the policy while it’s active, you may lose the coverage.
Group disability income coverage is linked to your base salary, specifically the Wage and Tax Statement that your employer sends annually to the IRS. This means that other financial factors like incentives, commissions, various benefits, and bonuses are excluded regarding the policy.
This is less liberal than individual policies which also may not require detailed income documentation when filing a claim.
While these are the downsides of group disability income policies compared to individual insurance, there are certain advantages, too. Firstly, the coverage can come as an additional benefit offered by the employer. Next, a group plan can be supplemented by an individual policy. Finally, the premiums for group insurance are usually lower than for the individual type.
Short-term insurance can vary when it comes to benefits. Some policies may pay the full amount of earnings, while others might offer only a percentage. Generally speaking, coverage for short-term group disability income policies will commence almost immediately or have a brief period of elimination — the amount of time an employee must wait before the collecting benefits. After the elimination period is over, the benefit will be available to the employee.
On the other hand, group long term disability insurance benefits usually come with an elimination period of three months. Also, long-term policies tend to pay only up to 60% of the employee’s base salary. Additionally, there might be a monthly benefit maximum that doesn’t take into account the total salary.
These benefits may be extended by some employers who can offer additional coverage. In that case, up to 70% of the salary could be covered.
Not surprisingly, short-term group disability income insurance has shorter benefit periods, usually between three and six months. Some policies might extend the benefits to an entire year. Long-term coverage may have a benefit period of anywhere from five years to a decade. In certain cases, the benefit period can be defined by employee age rather than duration in years. Then, the employee might receive benefits until they’re 65.
If the employee is no longer disabled while the benefit period is still active, benefits will cease.
Disability claims often require a longer period to resolve compared to other types of coverage. This is mostly due to the way disability is defined.
The most common issues arise in cases when the disability has a less apparent cause than a work-related accident. This can include skeletal, mental, or muscular health issues. At that point, the definitions come into play.
In general, white-collar professions usually have more fleshed out definitions than their blue-collar counterparts. The most effective definitions consider disability as a condition in which you can’t continue to work in your own occupation. This is a narrower definition that practically ensures the policy holder will receive the benefits.
Unfortunately, some insurance types like group disability income insurance have much broader definitions. For example, the policy might define disability as the state of being unable to work in any occupation.
In other words, under that definition, you might not be eligible for coverage if you can work in another profession.
The definition issue is especially complicated when the duration is considered. With group disability insurance for small business, an employer disability plan’s definition can switch from “own occupation” to “any occupation” after several years.
Group disability income benefits might be subject to taxation depending on who’s paying the premium.
In most cases, the employer will be the one covering the entire cost of the premium. For such plans, the benefits will be taxable since the employee will receive income from the policy without incurring its cost.
On the other hand, you can choose to pay for a portion of the premium or even cover the full amount. In those instances, you’ll only be taxed on the percentage in which you’ve participated in the premium.
Simply put, if you cover half of the premium, only half of the received benefits will be taxed. And if you pay the premium in full, the benefits won’t be subject to tax at all.
It might seem that individual insurance is superior to group plans in all instances. In fact, you might ask what are the advantages of group disability insurance when individual plans often have better benefits.
One of the major deciding factors when it comes to group versus individual disability insurance is the price. With individual policies, you can expect to pay from 1% to 4% of your salary, depending on your occupation, age, health, gender, and income. This can easily amount to more than $100 per month.
Group policies are usually less pricey since they represent the insurance equivalent of buying in bulk. Also, as mentioned before, the employer will often cover either a part of the premium or the full cost.
The other significant advantage of group disability insurance is that it’s guaranteed issue.
Guaranteed issue means two things: Firstly, the policy involves no underwriting. Once you apply, the enrollment is automatic. Secondly, employees with pre-existing conditions may be eligible for coverage. The second part presents a huge upside, although some plans might come with a particular limit regarding pre-existing conditions:
In some cases, coverage for pre-existing conditions may not commence if you haven’t had the insurance for a minimal period, i.e., a year.
Compared to group insurance, individual policies have an extensive underwriting process.
After you submit the application, you’ll need to have a detailed exam. This exam will comprise of an interview where you’ll disclose your entire medical history with any pre-existing conditions you’re aware of. Then, your pulse, blood pressure, height, and weight will be measures and urine and blood samples collected.
All of the results will go to the underwriter who’ll review them thoroughly. Additionally, your employment, financial, and medical records will also be subject to scrutiny. In fact, the insurer will reach out to your physician and ask them to fill out the Attending Physician’s Statement.
If there’s reason to believe that your pre-existing conditions are the cause of disability, benefits can be excluded or, in the worst case, the policy completely denied.
When all this is considered, it doesn’t come as a surprise that some people would rather opt for the relatively hassle-free group disability insurance.
We’ve mentioned that purchasing group insurance is much like buying in bulk. However, that’s not the only reason why group insurance is generally more affordable.
The primary reason for the price difference has to do with the risk insurance companies take with group versus individual insurance. In the case of group plans, that risk is spread out.
According to statistical data, around a quarter of individual workers may become disabled before retirement. These disabilities might be temporary or permanent, but they can make the employees eligible for benefits.
When an insurance company issues an individual policy, they have a 25% risk that they’ll end up paying benefits. This risk needs to be covered, which is done through larger premiums. Similarly, underwriting serves the purpose of determining the risk for individual applicants. If the risk turns out to be greater, the company will charge more for the premium.
With group disability insurance, this risk gets spread out to a point where it’s viable for the insurance company to charge lower premium rates.
If a company of 100 employees provides group disability insurance for all workers, it’s statistically likely that only 25 of those employees will ever suffer a disability and collect benefits. Other workers might never file a claim throughout their work life.
In other words, the company will collect premiums for 100 people over the course of four decades and potentially only cover 25 policies during the same period.
This principle can make disability insurance for small business particularly attractive.
Group disability insurance has certain downsides that warrant caution. For example, it’s possible to lose coverage in several ways.
As mentioned, changing your occupation, losing employment, or quitting an organization can cause you to lose the policy. Also, your organization might decide to discontinue the insurance offer, putting an end to the group plan.
This is a significant downside since you can lose coverage due to factors that are beyond your control. In contrast, an individual policy will remain the same as long as you keep the premiums coming in. And, of course, such a policy will be tied to you rather than to your job.
Next, the reduced cost of group policies comes with a reduction in benefits. Depending on whether the policy has a benefit cap, you could get less than 60% of your income in coverage. In addition, group plans usually don’t have optional riders.
Riders are a way to customize the plan to your specific needs. They might account for certain grey areas of disability, potential coverage increases, and more.
When the downsides are considered, it would be best to use group disability insurance as an addition to your individual plan. This is especially true if the premium you can get is very low or completely covered by your employer.
Perhaps the best answer to the question “what is group disability insurance” would be: a handy addition to a more considerable individual policy.
Group insurance comes with certain upsides that shouldn’t be disregarded. After all, if you can supplement your insurance at no cost, why wouldn’t you take the opportunity? However, this policy type should never be the only way you secure yourself against potential loss of work due to disability.
You can learn more about group and individual disability insurance and get into the fine details of your plan by contacting us.
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