Disability insurance agents routinely criticize group disability insurance policies, and for plenty of good reasons. However, I recently bought one anyway. Let me explain why. But first, a brief review of why group disability is generally inferior to a solid individual disability insurance policy.
Disadvantages to Group Disability Insurance
But first, a brief review of why group disability is generally inferior to a solid individual disability insurance policy.
1) Weaker definition of disability
Instead of getting a true, specialty-specific, own-occupation definition of disability, group disability generally gives you modified own-occ. It pays for two years if you can't perform your specialty, then after two years, only pays if you can't do any job.
2) Benefits offsets
If you get Social Security or Workers Comp disability benefits, those are generally subtracted from the proceeds of group disability policies. Not so with better individual policies. This is probably one reason why the first $5K or so of group disability policy benefits is so much cheaper than the second $5K (1/3 the price in my case.)
3) Not portable
If you leave the employer, you can't COBRA disability benefits.
4) Cancelable
In insurance-speak, non-cancelable means that the company can't raise rates on you. While that isn't the big deal many agents make it out to be, if you want a non-cancelable policy, you pretty much need an individual policy.
5) Usually no cost-of-living adjustment
The older you are the less this matters, but most people buying individual polices get a COLA to the policy will pay more as inflation goes up.
6) Mental and nervous disorders exclusion
It's possible to get an individual policy without an exclusion for going nuts. Most group policies (and many individual policies) only pay for two years if you're disabled for psychiatric reasons.
7) Fewer legal rights
This gets a little complicated, but in essence, if your disability falls into a grey area and the company doesn't want to pay, you stand a better chance of making them pay on an individual policy than a group policy.
8) Fully-taxable payments
The benefits paid out on an individual policy are completely tax-free, but with a group policy, they're fully taxable.
Why I'm Buying A Group Policy Anyway
Those are 8 good reasons why you should buy an individual disability policy. Yet I've decided to get a group policy. Am I stupid? I'll let you be the judge, but let me explain my reasoning.
1) I already own an individual policy.
My individual disability policy bought as a resident (and with a future purchase option exercised as an attending) essentially covers all of our most basic living expenses. Mortgage, utilities, insurance, food, and typical monthly expenses. We decided we wanted a little more coverage for occasional expenses and truthfully, now that I make more as a partner, we spend more, and we don't want to stop just because I get disabled.
2) I own far less disability coverage than I qualify for
You can generally buy enough disability coverage to cover 60-70% of your income. I currently own enough to cover 25% of my income. If I wanted to, I could buy this group disability coverage and just as much more individual coverage. If you find you need or want just as much as you can qualify for, you probably want it all to be individual. But since we live on about 25% of our income, once you take out taxes, charitable contributions, and retirement savings, we just don't need anywhere near 60% of my income. I've posted before about how we figure we need about 28% of our income to retire. If I decide next year that I want that individual policy, owning a group one won't prevent it.
3) Retirement is set
Some people want to get enough disability insurance that they can pay their expenses AND continue to save for retirement. As a rather religious saver, I've pretty much already paid for my retirement. Don't get me wrong, I don't have enough money to retire today. BUT, if someone is going to pay for all my living expenses between now and age 65, then I do have enough to retire today. At 7%, your money doubles every decade. I have a large enough nest egg that if it doubles 3 times between now and age 65, my retirement will be set. And every year that amount grows, decreasing my need for disability insurance.
4) Group policies are cheaper
Unlike with investing, when it comes to disability insurance you generally get what you pay for. Nonetheless, group disability policies are generally MUCH cheaper than individual policies. I asked Larry Keller, an insurance agent who occasionally guest posts here, to send me quotes from all the major companies so I could compare them. Now, it's a bit like comparing apples and oranges, but we standardized it as much as we could. Here's what I found:
We looked at policies with a $5000/month benefit without a future purchase option. Admittedly, all of these individual policies automatically included some type of a COLA. This is what we found for me, a 37 year old emergency physician.
| Policy | Annual Price | Percent of Income Protected |
| Group Disability Policy | $1,800 | 3.00% |
| Berkshire | $2,867 | 4.78% |
| Standard | $2,291 | 3.82% |
| Principal | $2,142 | 3.57% |
| Union Central | $2,597 | 4.33% |
| Metlife | $2,464 | 4.11% |
5. Premiums Are Tax Deductible
Agents selling individual disability love to tout that the benefits are tax-free. This is because you pay for them with post-tax dollars. Group policies are like any other benefit at work, the employer (possibly you) gets a tax deduction for the premiums, so the benefits are fully taxable to you. In my opinion, this doesn't make a lot of sense. Think about it: Which would you rather get the tax break on, a payment you're definitely going to make every month while earning a lot of money, or payments you have a 14% chance of even getting, which will surely be less money than your peak earnings? In my opinion the bird in the hand is worth far more than the two in the bush. You just have to do the math.
First on the premiums. My marginal tax rate next year, between federal and state, will probably be 38.9%, perhaps more if the Republicans in Congress cave. So the real price I'm paying for that group disability insurance premium is not $1800, it's $1100, or 1.83% of the income protected, less than half of what most individual policies would cost me.
But what about the payments? They're also taxed, but not only am I much less likely to get the benefits than to pay the premiums, but they'll be taxed at a far lower rate. If I get disabled, most of my income will come from my tax-free individual disability policy, supplemented by this group policy. My gross income (just including the group policy) would be $60K. After the standard deduction and exemptions for my little family, my taxable income would be $29,900. How much in taxes do you suppose I'd pay on that? No more than $3615 Federal and $1495 State, or about 8.5% on that $60K (and far less on my actual income including the individual policy.) Saving money at 38.9% and spending it at 8.5% seems like a winning recipe, much like using a tax-deductible retirement plan.
6) Premiums are automatically paid monthly
If you actually want to pay your individual disability policy premiums monthly, they're higher. Not so with group disability policies. The employer/partnership takes care of the hassle factor for you by taking it automatically out of your pay each month before you get your paycheck/distribution.
7) I don't plan on going anywhere
An emergency doc is always at risk for a contract loss and having to go somewhere else. But I'm in a stable position in a stable group in a stable hospital. I expect this to be my last job. The portability of a policy is much less important to me now than it was as a resident.
8) No medical underwriting
This is a huge benefit of group policies in general. In fact, some docs in my partnership use the group health insurance plan because its cheaper than what they could get on their own due to health problems in their family. While I do have to fill out a medical questionnaire for the group disability policy, it's far less involved than a typical questionnaire for an individual policy, and I don't believe there is any type of exam or lab testing required. At any rate, after looking at the questionnaire, I have no doubt I'll pass.
9) No extreme sports riders
More important to me than the medical underwriting (or lack thereof) are those pesky questions about flying, jumping, climbing, and diving they always ask. As you may recall, my individual policy has a rider that basically says if I'm disabled climbing it won't pay me anything. The group application doesn't even ask the question. It was important to us that we have at least something if I get disabled climbing. After shopping around with the various individual disability companies, there weren't any willing to issue me a policy without a similar rider.
Conclusion
So there you go, maybe my decision does make a little sense after all. You might even want to spend a little on your own group disability policy. But most docs still ought to get the biggest individual disability policy they can buy as a resident, and upgrade it significantly upon graduation before considering using a group policy.
I disagree with your comment that this will be your only job. I too am an ER Doc and was employed by a stable group that had been around for 28 years. I had been with the group for 16 years when suddenly and without warning our group was forced to split into 2. We parted amicably, but my smaller group ended up joining a larger regional group. A good group, but a different group with very different benefits. Don’t skimp on your individual disability insurance assuming that your company can and will provide group insurance forever.
Thank you for your comment. The lack of portability is a definite downside of using a group policy. The lack of covering my most dangerous activity is a definite downside of using an individual policy. It can be tough to weigh all the factors. In many financial things, when you aren’t sure what to do, it’s often a good idea to split the difference. That’s basically what I’m doing here.
im pretty sure you can make the benefits tax free from group if you have the company pay for it with after tax dollars.
the problem becomes in the end the following: there is a big reason why individual is more expensive that one needs to consider and that is group is just much less likely to pay out. I dont doubt there is also an extra premium with individual policies that we pay but still a good part of the cost increase is because the chance of getting paid if disabled is higher.
very interesting idea none the less.
You can rationalize all you want, but why not protect as much of your income as you can? It’s nice to think you don’t need all your income, but as my husband and I have found since his permanent disability 8 years ago, we really wish we had purchased an individual policy instead of having to rely on his group policy and SSDI- because all the associated costs of a disability are EXTRA and don’t fall under income replacement… like paying for a caregiver or medical equipment/medicine not covered by insurance. He was highly compensated and young (mid-40s) and cannot work again- with group and SSDI we’ve lost over half his income, his bonus, cost of living increases AND contributions to his 401K. Now tell me again why you shouldn’t protect as much of your income as you can?
you cant protect bonuses by the way. Typically the most you can protect is around 60% of your income. I personally feel the retirement plan protection riders arent a great deal and really wish the companies improved those like made them own occ and didnt have all those hidden fees for having a trust and lousy investment options within the trust.
Im pretty sure WCI already mentioned he has personal disability as well.
The reason some may chose not to protect is primarily cost. Im sorry you are in a bad situation but every person has to decide for him or herself what is worth the cost based on the risk. Nobody has a time machine or a crystal ball as far as i know. I myself recommend own occ disability to my friends but i wouldnt fault someone for chosing group if that is what they could afford.
Group doesn’t necessarily mean it isn’t own occ. This particular group policy is only own occ for two years, but the one available through ACEP is true specialty-specific own-occ. You just have to read the fine print.
And absolutely the reason group costs less is it isn’t as likely to pay out. No argument there.
As far as why not buy as much insurance as possible? It’s all about cost. Why not buy $10 Million in life insurance? Answer- you don’t need it. Why not buy $10 Million in Umbrella insurance? At some point, you’re overinsuring. That point is different for everyone. Overinsuring costs you money you could put toward something else.
Naturally, if you get disabled you’ll wish you’d bought more, just like if you die your spouse will wish you’d bought more life insurance. But you have to find a balance there.
Group insurance is less expensive because it pays less, sometimes even as little as $100/mo; it is designed and priced to offset for “other income benefits” regardless of the definition of total disability or the duration of own occupation or specialty protection.
Typically, Group promises to pay a percentage of earned income up to a cap, MINUS “other income benefits” which usually include: State Disability, Social Security Disability, Workers’ comp, other Group/association plans, and Income from Any Occupation, among many others.
Personally owned individual disability insurance is specifically not offset-able unless it is employer paid, as part of a qualified sick pay plan, in which case it is offset-able.
Group’s perceived own occupation benefit can be literally erased by offset-able income earned from any occupation. Depending on the cap and the amount of offset-able income benefits, the monthly can be offset completely. Hence the reason most group policies include the feel-good minimum monthly benefit of $100-300/mo.
Read your policy carefully. Generally, any capitalized word is defined in the policy somewhere. Find the list of offsets or the definition of “other income benefits” and do the math. You will get what you are paying for.
Remember that definition of total disability in a group LTD plan – even if it is called “Own-Occ”, requires both an inability to do one or more of your job duties coupled with a loss of income of at least 20% compared to your pre-disability income.
Obviously, this is not the case with individual policies. Meaning, if you are disabled as an ER Physician, go back to law school, become an asset protection attorney and earn more income doing that compared to when you were an ER Physician, the group LTD plan would not pay benefits at all.
An individual plan would allow you to collect full benefits in addition to the income you earn practicing law.
Larry-
While it’s always nice to get more benefits, its pretty easy to argue that you shouldn’t insure against non-financial catastrophes, like being able to replace your income doing something else!
It’s also something that is highly unlikely to happen. The % that are able to do such work let yet are considered disabled is extremely small. If I’m so disabled that I can’t do my job as a physician then I’m not going back to school and studying for the bar.
While I may agree with both of you, I really only wanted to point out that a group policy that is touted as being “Own-Occ” really is not (compared to the provisions found in an individual policy).
While you don’t want to overinsure or pay substantailly more for this benefit, when comparing individual policies if one is true “Own-Occ” and another is not, and the price is the same or less for the true “Own-Occ” policy, why not purchase the policy with the better definition?
Unfortunately (or fortunately), I have had several clients and colleagues disabled from their occupations, transition into new occupations, earn more money, and still collect full disability benefits.
i agree that it doesnt make sense to pay the same for a lesser definition. Unfortunately this statement implies that there is real evidence to suggest that true own occ is more likely to pay out if disabled. Im not aware of any such evidence. If they cost the same then likely there isnt much of a difference on chances of payout. Still id buy own occ but i dont want to give a false impression that i believe it really it is much more likely to pay out.
Common insurance company montra is that they dont want to allow you to make more money being disabled thus while im sure it happens, im also pretty sure it must be a rare event.
Rex-
It is not that one definition of total disability is more likely to pay benefits compared to another definition of total disability (although that can be the case). However, if a claim is not based solely upon loss of income, it can be easier during the claims process (a surgeon with an essential tremor that can no longer perform his or her duties as a surgeon is a good example).
As you know, certain companies are more expensive compared to others and the occupational classification for certain specialties also can differ from company to company.
Therefore, like anything else, disability insurance buyers should do their homework and make a well-informed decision after reviewing the options available. All too often, I see physicians and other professionals make decisions based on what their friends and/or colleagues did, only reviewed one company’s illustration and pricing and that might not work to their advantage.
Thankfully, for those on this blog, this is not the case as they are researchers and want to be educated before they make decisions. Otherwise, they would not be here at all.
While I’m in favor of own occ
Again there is no evidence of an easier claims process. It’s the same problem.
If you have a minor tremor be prepared for a fight own occ or not not.
Where would you expect to find that evidence Rex? The Journal of Disability Insurance?
I tend to side with Larry on this one. Just reading through a typical individual policy and a typical group policy, I would expect it to be harder to collect on the group policy if the disability fell into a gray area. I can’t prove it, and I doubt anyone can, but one also cannot prove the opposite for the same reasons.
Im sure they do have claims data, it just isnt published. I also imagine that if the data was really powerful that the few companies that sell own occ would find a way to get that out there. These are of course just guesses.
As L mentioned sometimes the price is the same or very similar. In those situations you either have to assume one company is charging too much or the wording of the other doesnt hold more value. It has to be one way or the other. None of us actually know which way it goes.
As ive mentioned several times, im in favor of own occ individual policy but i dont want to pretend its magically better than other wording for no additional cost.
With regard to the value of Own Occ vs. Modified Own Occ, you can simply review pricing with a single company, including and not including the Own-Occ rider. Many providers are now offering both. Comparing two separate companies would bring other variables into the comparison. As one could easily assume, the difference in pricing for an attorney or CPA will be minimal. The difference in pricing for a surgeon will me more considerable (perhaps 10-15%).
Something else to consider… Many group policies require 90 days of consecutive total disability in order for a benefit to be paid. Individual policies typically have a 90-day elimination period too, but can be satisfied within a 180-210 day accumulation period. I’d rather need 90 out of 180 days, than 90 of 90.
That doesnt necessarily work. If one happens to talk to a NWM agent as an example, you will hear tons of stories of how the company does the right thing and makes claims easier then any other true own occ policy. One is really forced to compare one company to another.
In case i wasnt clear, im still in favor of personal own occ protection.
I definitely think that you were clear, Rex.
I was just suggesting that one may be able to asses the value of Own Occ by comparing a single company’s policy, with and without Own Occ. The same comparison can be done with every company who offers Own-Occ and non Own-Occ: Principal, MetLife, Guardian, Ameritas, MassMutual.
As you know, the NWM argument can unfortunately not be addressed because they do not offer Own-Occ. There is no way of you or I knowing how much extra/less they would be charging for Own Occ. Can’t help but wonder why they wouldn’t just offer both definitions and gain a larger market share.
Lots of pieces here, but not the complete picture. Group benefits can be non-taxable and bonus can be included in the definition of income. It is important to remember that individual policies are issued in an indemnity amount that is based on earnings at the time the policy is underwritten. Group policies are generally written as a percentage of pay which means the benefit can fluctuate. That means choosing the right definition of earnings is critical in choosing a group plan (this is often overlooked). Without going into a long post here, there are advantages and disadvantages to both group and individual policies. A carefully thought out, coordinated combination of both types of coverage can optimize your disability benefits at a reasonable cost. Just like in the individual market, there are group carriers that specialize in physician coverage. My recommendation would be to work with an adviser who is an expert in both. How you structure the policies to interact can make all the difference.
Certainly not all group policies are written as percentage of pay (mine isn’t.) The problem with getting an adviser for your group policy is that you can’t choose the policy. Your employer has likely already chosen it for you and it’s a take it or leave it situation. The only choice to make is whether or not to use it.
Note I used the word “generally” as opposed to “always”. What I was mainly referring to were practices where the docs (as a group) get to shop for and choose the group policy. Of course having an advisor who is expert in both can also help you make the “buy or not” decision you describe while you are considering individual policy options. Whether you control both ends of the decision or just one, coordinating the two as best you can is a good idea.
In any event, I do think you are providing a great service by discussing the ins and outs of a very important financial tool. Thanks for allowing me to post.
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Thanks for all the valuable info. Learning about this is making me more confused. So if one has an individual policy, and then gets a group policy, how do they work together if one were to become disabled?
Let’s say, I had an individual policy of $4k/month, and a group policy that covers 50% of my income. If I were to become disabled, does that mean the group kicks in 50%, and the individual kicks in an additional $4k/month (up to a certain maximum percentage of my income)?
If there are limitations between the two (I’ve heard people say 60% is max – not sure if this is true), then what about if the group only covers own occupation for 2 years? Then if the 50% stops after two years, and your individual had covered only an additional 10%, does the individual kick in for the full benefit?
John-
If one purchases their individual disability insurance policy when they are an intern, resident or fellow, any coverage provided by a future employer will not impact their individual policy and they can legally collect under both policies – even if they then become “overinsured”. The same is true if the individual policy is purchased using “New In Practice” limits. Generally, these are available during the last six months of training up to the first two years in practice (this varies among carriers).
However, if you want to increase your individual coverage beyond those limits, any employer provided group LTD coverage will be taken into consideration along with your income. As a result, if you take a job with an employer that provides a large amount of disability insurance (for example, 60% salary with a maximum monthly benefit of $25,000), you might find that you do not qualify to purchase any additional coverage.
Unlike health insurance, there is no such thing as a primary or secondary company. As long as you disclose to the carrier that you are applying to for coverage what you already own and the policy is issued, you will collect on it in addition to the other coverage that you have inforce.
Each company uses their own Issue and Participation (I&P) limits and has a certain replacement ratio of your income that they are willing to insure. For this reason, it is important that you work with an agent that is familiar with several companies to best help you integrate and coordinate multiple policies, if necessary, to best protect your income.
The problem is as you mention. There are many advantages to individual insurance compared to group LTD (although, as mentioned, in some cases, group LTD may have its benefits). If the definition of total disability changes, and you no longer qualify for benefits on the group LTD plan, your individual policy’s benefits will not change. The individual companies do not look at the definition of any individual, group or association plans that you have – only the amount of coverage that you could potentially collect.
hope this helps.
Thanks, Mr. Keller, for taking the time to give such a thorough answer.
I have an individual plan with a future purchase option rider to purchase more benefit without underwriting (I believe it is 3x my current benefit), and a group policy through an employer. I was concerned because my HR person mentioned something about a 60% max. If I were to increase my benefit using the purchased rider on my individual policy, I would most certainly exceed the 60% they mentioned.
Does what you explained (coverage provided by a future employer will not impact their individual policy) also apply in the situation where you increase your benefit with a future purchase option rider?
No. In order the exercise the future purchase option rider, the individual insurance company (from which you own your policy), will take your current income and employer provided group LTD coverage into consideration. Your agent should also be able to tell you how much of the rider you can exercise, if any, and the cost associated with the increase.
Again, keep in mind, that special limits may apply – depending upon how long ago you completed your training that could allow you to purchase additional coverage and potentially allow you to insure (at this point) significantly more than 60% of your income (it also depends upon your specialty).
Additionally, if you don’t qualify to exercise the FPO Rider on your current policy, you might also be able to purchase additional coverage from another company if their I & P limits are higher compared to the carrier from which you have your current policy.
Are short-term disability / salary continuance typically factored into individual disability insurers’ I&P limits?
Short term disability is generally considered completely separate from long-term disability. Having a short term disability policy in place should not affect how much long-term disability you can buy.
It’s interesting how you said that disability insurance claims can be reduced in price because of workers comp benefits. This seems like it would be really beneficial because if you were injured at work and couldn’t go back then you could have help for cheaper. That way you would never have to worry about money because everything would have been taken care of for you.
can somebody comment on supplementing an individual disability with a disability plan from an association? Association plans are more portable, however they do have a medical questionnaire too, but I’m not sure how in-depth it is. I have a permanent exclusion from my individual disability. My current work place does not participate in a GSI.
I used a group policy for that reason.