Disability insurance agents routinely criticize group disability insurance policies and for plenty of good reasons. However, I bought one anyway more than a decade ago. 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
#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, and then after two years, it only pays if you can't do any job.
#2 Benefit Offsets
If you get Social Security or workers comp disability benefits, those are generally subtracted from the proceeds of group disability policies. That's not the case with better individual policies. This is probably one reason why the first $5,000 or so of group disability policy benefits is so much cheaper than the second $5,000 (1/3 the price in my case).
#3 Typically Not Portable
If you leave your employer, you may lose the group plan. When portability is available for a group plan, the benefits are typically not as strong as those of an individual policy.
#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 (guaranteed renewable is probably fine, especially if much cheaper), you pretty much need an individual policy if you want a non-cancelable policy.
#5 Usually No Cost-of-Living Adjustment
The older you are, the less this matters, but most people buying individual policies get a COLA, so the policy will pay more as inflation rises.
#6 Mental and Nervous Disorders Exclusion
It's possible to get an individual policy without an exclusion for mental issues. 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 gray 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 Taxable Payments
Group policy benefits are generally taxable when your employer pays the premiums, while individual policy benefits are typically tax-free when you pay the premiums.
More information here:Why I Bought a Group Policy Anyway
Those are eight good reasons why you should buy an individual disability policy. Yet I decided to get a group policy about 15 years ago. Am I stupid? I'll let you be the judge, but let me explain my reasoning.
#1 I Already Owned an Individual Policy
My individual disability policy bought as a resident (and with a future purchase option exercised as an attending) essentially covered all of our most basic living expenses—mortgage, utilities, insurance, food, and typical monthly payments. We decided we wanted a little more coverage for occasional expenses, and truthfully, when I started making more as a partner, we spent more. We didn't want to stop doing that if I got disabled.
#2 I Owned Far Less Disability Coverage Than I Qualified For
You can generally buy enough disability coverage to cover 60%-70% of your income. When I originally wrote this post in 2012, I owned enough to cover 25% of my income. If I wanted, I could have bought 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 we lived on about 25% of our income, and once you took out taxes, charitable contributions, and retirement savings, we just didn't need anywhere near 60% of my income. I've posted before about how we figured we needed about 28% of our income to retire. If I eventually decided that I wanted that individual policy, owning a group one wouldn't have prevented 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'd pretty much already paid for my retirement. Don't get me wrong, I didn't have enough money to retire at the moment I wrote this post. BUT if someone was going to pay for all my living expenses between then and age 65 (a weird variant of Coast FIRE perhaps), I did have enough to retire immediately. Every year, that amount grew, decreasing my need for disability insurance.
#4 Group Policies Are Cheaper
Group disability insurance is usually cheaper than individual disability insurance for a few reasons. First off, a bunch of people are covered—your co-workers, for example. This spreads out the risk for the insurance company because it's less likely that a bunch of people will make claims all at once. That lower overall risk for the insurer translates into lower premiums. Also, with group policies, there's less paperwork and sometimes no need for a full-blown medical exam. Employers often kick in to help cover the costs, making it even more affordable. There are some trade-offs, though, like less flexibility and fewer riders and benefits compared to individual plans. It's a good idea to check the details and make sure it suits your needs.
#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. This doesn't make a lot of sense to me. 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 10%-25% chance of even getting, which will surely be less money than your peak earnings? The bird in the hand is worth far more than the two in the bush. You just have to do the math.
First, consider the premiums. If my combined federal and state marginal tax rate were 38.9%, the after-tax cost of my $1,800 group disability insurance premium would be about $1,100, or 1.83% of the income protected—less than half of what many individual policies might cost me.
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, they'll be taxed at a far lower rate. If I had gotten disabled, most of my income would come from my tax-free individual disability policy, supplemented by this group policy. My gross income (just including the group policy) would be $60,000. After the standard deduction and exemptions for my little family at the time, my taxable income would be $29,900. How much in taxes do you suppose I'd have paid on that? No more than $3,615 federal and $1,495 state, or about 8.5% on that $60,000 (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 Didn’t Plan on Going Anywhere
An emergency doc is always at risk for a contract loss and having to go somewhere else. But I was in a stable position in a stable group in a stable hospital. I expected that to be my last job (and that has so far proved prophetic). The portability of a policy was much less important to me at the time 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 used the group health insurance plan because it's cheaper than what they could get on their own due to health problems in their family. While I had to fill out a medical questionnaire for the group disability policy, it was far less involved than a typical questionnaire for an individual policy, and I don't believe there was any type of exam or lab testing required. At any rate, after looking at the questionnaire, I had no doubt I would pass.
#9 No Extreme Sports Riders
More important to me than the medical underwriting (or lack thereof) were those pesky questions about flying, jumping, climbing, and diving. My individual policy had a rider that basically said that if I got disabled while climbing, it wouldn't pay me anything. The group application didn't even ask the question. It was important to us that we have at least something if I got 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.
It turned out that was a pretty good concern for us to have, given that I've only been disabled once and guess how it happened? Now, by the time it happened, we were way past financial independence, and we had cancelled both disability policies. Plus, I wasn't disabled from work long enough for an insurance company to even pay me anything, but if that fall had happened a decade earlier and had been more serious, the group policy would have been the only one that paid.
More information here:- 17 Physician Disability Insurance Mistakes to Avoid
- Is the American Medical Association (AMA) Disability Plan Worth It?
The Bottom Line
In retrospect, I think our decision to buy a group policy did make sense after all. You might even want to spend a little on your own group disability policy. Most docs, though, 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.
Did you buy a group disability policy? Why or why not? Do you also have an individual policy? Would you consider buying a group policy even if you already have an individual policy?
[This updated post was originally published in 2012.]
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