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.
Why Group Disability Sucks
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.
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%|
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.
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.