Group disability insurance can be an affordable and convenient way to get coverage, but the lower price often comes with important tradeoffs. Group policies generally have a weaker definition of disability—which can make it more difficult to qualify for benefits when the cause of disability is less clear, such as chronic back pain, anxiety, depression, or a head injury without an obvious radiological finding. They may also reduce benefits if you receive workers compensation or Social Security disability benefits, and some may even offset benefits from individual disability policies. Group policies are typically not portable either, meaning you may lose your coverage when you change jobs and have to purchase a more expensive individual policy later in life, potentially after developing medical conditions that make coverage more difficult to obtain.
Individual disability policies generally offer stronger protections. They are more likely to be noncancelable. They can include cost-of-living adjustment riders to help benefits keep pace with inflation, and they may provide better coverage for mental and nervous disorders. Individual policies also give you stronger legal rights because you own the policy rather than your employer. There can be significant tax differences as well. Employer-paid group disability premiums are generally deductible to the employer, which typically means benefits received by the employee are taxable. When you purchase an individual policy with after-tax dollars, the disability benefits are generally received tax-free.
That does not mean group disability insurance is always a bad choice. Group policies can be significantly cheaper. They often require little or no medical underwriting, and they may provide coverage for someone who has medical conditions or dangerous hobbies that would result in exclusions on an individual policy. They can also make sense if you expect to remain with the same employer for your entire career. Many physicians ultimately choose to mix and match coverage, using an individual policy for its stronger disability definition and portability while supplementing it with less expensive group coverage. The key is understanding exactly what each policy covers, what it excludes, how benefits may be offset, and whether the coverage will actually protect your income when you need it most.
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Dr. Jim Dahle:
Sometimes people wonder whether their group disability insurance policy is good enough, especially when they find out that individual disability insurance generally costs quite a bit more than group disability insurance, but there are some downsides that come with that lower price. The main one is a weaker definition of disability. The most important thing about a disability insurance policy is that it actually pays you if you get disabled, and sometimes it's very obvious you're disabled. Right? You've lost an eye, or you've lost the ability to hear, or, you know, your arm was chopped up in a farming accident. You know, it's very obvious you're disabled.
But there are plenty of causes of disability that are a little bit more gray, like chronic back pain, like anxiety or depression, or, you know, a head injury or something like that, where maybe there's not a radiological finding that can definitely say this is the disability. And so it might be a little harder to claim disability if you have a weak definition of disability. And as a general rule, you will have a weaker definition with a group insurance policy.
You know, it's interesting. Some of them also offset benefits. Okay, so if you're getting workers' comp disability benefits or you're getting Social Security disability benefits, this group policy will reduce how much it's paying you to offset those. It might even offset your individual policies that you bought, and so keep that in mind. If you're not actually going to get what you think you're going to get, it's not nearly as valuable and maybe not worth even paying for.
Another huge downside of a group disability policy is it's not portable, right? If you change jobs, you can't take it with you. And maybe you're going from a job that offers group disability to one that does not offer group disability, and now you find yourself at age 45 having to buy an individual disability policy that costs way more than the one you could have bought at 30. And also, maybe now it excludes some of the medical conditions you've discovered in the meantime, or they won't sell you a policy because you've developed some medical conditions or you've taken up some, you know, particularly dangerous hobbies. And so not having portability on that policy really matters.
Group disability policies can also be cancellable, right? There are non-cancelable policies, there are cancellable policies, and you're much more likely to not have a non-cancelable policy when you buy a group policy.
Most group policies also don't offer any sort of a cost-of-living adjustment. If you get disabled at a young age of 40, that amount of money it's paying you at 60, after inflation has wreaked havoc for 20 years on the economy, is not going to be nearly as valuable at 60 as it was at 40. It's much easier to buy a cost-of-living adjustment rider on an individual policy than it is to get that added to a group disability policy.
Disability policies also will often exclude what they call mental and nervous disorders. We're talking about things like anxiety, depression, schizophrenia, bipolar, those sorts of things. If you think you can't develop one of those, you know, that is not the case. Many, many people have developed those that they did not have at 25 or 30 or 35, well before retirement age.
If your disability falls into that gray area and the company doesn't want to pay, you stand a better chance of making them pay with an individual policy than a group policy. You basically have fewer legal rights with the group policy because you're not the one who bought it; the employer is.
Also, note that the premiums on that employer policy were probably a tax deduction to the employer, their business expense, and so the benefits, when they're paid out to you, are taxable benefits. Whereas if you pay for your individual disability policy with after-tax money, the benefits are generally after-tax as well, and you don't have to pay tax on the benefits.
So, does that mean you should never buy a group policy? No, absolutely not. In fact, for a good chunk of my career, I owned a group policy. The main reason I bought it was not only because it was cheaper than my individual policy, but because it did not have a rider that excluded rock climbing on it.
They didn't ask me any of those questions when they issued the policy, and so if you have a dangerous hobby or if you have a medical condition that's giving you problems getting a good individual policy, you might still qualify for the group policy through your employer or some other professional association. So that's less expensive. And, of course, if you're the employer, the fact that you can take a tax deduction on it might be valuable to you as well when you're buying those premiums, so that might be a reason why you might want to get an employer policy as well.
You may also be in a long-term job, and the portability doesn't matter to you because you don't think you're leaving this job until you're 65, in which case that's not as much of a benefit. It is also convenient. To get it through the employer, you often have no medical underwriting, and the premiums get taken out of your paycheck automatically. You don't have to write any checks, so sometimes it can be a really convenient place to buy insurance.
You might also find that you want to mix and match. You want to have an individual policy for the portability and the stronger definition of disability, and maybe you want a group policy for the lower cost and because it doesn't exclude some of the things you might already have. And so lots of doctors have more than one policy, and maybe one of them is a group policy and two of them are individual policies, or whatever. That's fine to mix and match them, but understand that there are benefits of an individual policy over a group policy. There's a reason it generally costs a little bit more to get an individual policy.
And anytime you want more information about this, we have agents standing by that we've vetted for years, the White Coat Investor community has vetted for years. If you go to whitecoatinvestor.com and go to the recommended insurance agent tab, you'll be able to find that information and find somebody who's helped many other White Coat Investors to get this critical insurance in place.
The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.
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