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Group disability insurance: Everything you need to know in 2024

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When it comes to employee benefits, most people are concerned with their health insurance, 401(k) plan, and vacation policy. But disability insurance is another perk worth capitalizing on if possible.

Disability insurance replaces some of the pay employees lose when they cannot work due to an injury or illness that is not related to their job. While it's smart to buy an individual policy, you should also participate in any group plans you have access to, especially your employer's.

In this guide, we cover everything you need to know about group disability insurance, including:

Read on to learn more!

What is group disability insurance?

Group disability insurance is a type of income protection insurance plan that covers more than one individual. In a group plan, the members of a particular group or organization are all offered the opportunity to receive disability insurance coverage.

Group disability coverage can be long term or short term. The plan's benefits and premium costs are generally the same for all members, regardless of their individual job occupation, health history, and lifestyle habits.

To help you better understand how group disability insurance works, let's answer some FAQs.

How many employees must be enrolled in group disability insurance?

Like many insurance plan details, it depends on what the insurance company offering the coverage will allow. It also may depend on the company or organization that is seeking to sponsor the plan.

Generally speaking though, employers will need to have at least 10 employees enroll in group disability insurance to be able to offer it as part of their benefits package. This number could be higher or lower depending on the insurance carrier. Always consult the insurance company you are seeking coverage from prior to purchasing a policy.

Where do I get group disability insurance?

The most common types of group disability insurance plans are those that are offered by employers. According to the Bureau of Labor Statistics (BLS):

  • 42 percent of private industry workers had access to short term disability insurance plans offered by their employers in 2018.
  • 34 percent of private industry workers had access to long term disability insurance plans offered by their employers in 2018.

For those working in state and local government last year, 26 percent had access to short term disability and 38 percent had access to long term coverage.

As of 2018, the BLS reported that employers offering group disability insurance typically pay the full cost.

  • Private employers paid the full cost for 85 percent of workers with short term disability coverage and 94 percent of workers with long term disability coverage.
  • State and local government employers paid the full cost for 87 percent of workers with short term disability coverage and 83 percent of workers with long term disability coverage.

Some membership organizations also offer group disability insurance. Examples include labor unions, guilds, and professional organizations. These plans are similar to those offered by employers. They may be an option for those who can’t get a group policy through their jobs.

Membership group plans also have the advantage of being more portable than employer ones. As long as you maintain your membership, you can continue being covered by a membership plan even if you switch jobs.

When does a group policy start paying benefits and for how long?

The period of time in which you will receive disability benefits depends on whether your group plan is short term or long term disability insurance. Both types of policies have elimination periods and benefit periods.

An elimination period, also known as a waiting period, is the period of time between when a disability occurs and when benefits are paid. The elimination period for disability insurance is similar to the deductible on property or health insurance. It’s the part you pay out-of-pocket before benefits kick in.

Short term group policies often have a waiting period of seven to 14 days before benefits start. Long term group policies usually have a 90-day elimination period, though some may make you wait 180 days.

A disability policy’s benefit period is the maximum length of time you can receive policy benefits. Group short term plans typically have a maximum benefit period of three to six months, though some may provide one year’s worth of benefits. Group long term plans vary, with benefit periods ranging from five years to 10 years. Some may pay benefits up to age 65.

Regardless of the policy’s benefit period, your benefits will stop once you are no longer disabled or in the event that you pass away.

How does group disability insurance affect my taxes?

Whether benefits are taxable typically comes down to two questions:

  • How much of the premium did you pay?
  • Did you pay it with after-tax dollars?

As stated above, most employers that offer group disability insurance pay the full cost. If your employer does pay the full premium, all of the benefits you receive from the policy will be considered taxable income. This is because you didn’t incur the cost of the policy, but are receiving income from it.

If you pay a portion of the group policy premium, you will be taxed on the same percentage of your benefits. For example, if you and your employer split the premium cost 50/50, you will pay taxes on 50 percent of the policy benefits you receive.

If you pay the full premium for group disability coverage, you are not taxed on any of the benefits you receive as long as you paid the premium on an after-tax basis.

In nearly all cases, the premium you pay for a group disability policy is done with after-tax dollars. This means you are not receiving a tax deduction based on the premium you pay.

For example, with health insurance, your premium cost actually reduces your taxable income, which means you pay less in taxes on your income. This typically does not happen with group disability insurance.

Learn More: Is Disability Insurance Tax-Deductible?

What are the differences between group and individual disability policies?

It should come as no surprise that there are a number of differences between group and individual disability insurance.

There are two key differences that favor group policies:

  • The cost of coverage.
  • How policies are issued.

Group disability insurance appeals mostly to people who:

  • Don’t want to spend the money on an individual policy.
  • Don’t want to endure the underwriting process.

Participating in a group plan is typically cheaper than buying an individual policy the same way buying in bulk is cheaper than buying six individual cans of Coke. This is especially true if the group sponsor, such as your employer, pays some or all of the policy cost.

Individual policies will typically cost the insured between 1 percent and 4 percent of their total income. The cost will vary based on:

  • Age
  • Gender
  • Job
  • Income
  • Health

Some applicants can expect to pay well over $100 a month for an individual disability policy.

Another key difference that favors group disability insurance plans is that they are guaranteed issue. This means if you apply for coverage, you are automatically enrolled. There is no underwriting.

Guaranteed issue also means that you can typically receive group coverage with a pre-existing condition. In some cases with group plans, a disability policy caused by a pre-existing condition may not be covered until you’ve had the policy for a minimum time period, such as 12 months.

On the other hand, individual policies include a full underwriting process. Once you’ve submitted an application for an individual policy, the insurer will schedule a paramedical exam. This will include an interview about your medical history, where you will have to disclose all known pre-existing conditions.

The examiner will also record your height, weight, blood pressure, and pulse, and collect blood and urine.

Your exam results will be sent to the insurance company’s underwriter. It's possible for pre-existing conditions to be discovered during this process. They will also review your medical, financial, and employment records. Your personal physician will be asked to fill out a form called an attending physician’s statement.

The insurer on an individual policy can exclude benefits if a disability is caused by a pre-existing condition. In some cases, they may deny you a policy altogether.

Learn More: Disability Insurance for Individuals

Why is group disability insurance cheaper per recipient than an individual policy?

The reason that group plans can offer more affordable coverage without underwriting is that the insurance company is spreading out its risk.

According to the Social Security Administration, about 25 percent of 20-year-olds will become disabled at some point before reaching age 67. That means individuals entering the workforce have a one in four chance of becoming disabled during their working years. It may be for a couple of months, a few years, or even permanently.

If you have an individual disability insurance policy, there is a 25 percent chance the insurance company will have to pay benefits at some point. Insurance companies have to price an individual policy to cover that potential risk.

In addition, some individuals have more or less risk of incurring a disability. This may be based on their age or current health issues. They may also have a job that would be difficult to perform were they to suffer from certain injuries or illnesses.

This is why individual policies require underwriting. With individual policies, the insurance company has to assess the risk of a single applicant. If the insurance company considers you high-risk, you will pay more in premium. It’s possible for an insurer to consider somebody so risky that they deny coverage altogether.

But group policies allow the insurance company to spread its risk out. For example, say a company has 500 employees and offers group disability insurance to all workers. The insurance company will collect premiums (either from the employer, the employees, or both) for 500 people.

But statistically, only 25 percent of them — 125 employees — will incur a disability over a 40-plus-year period. The other 375 will pay premiums and never receive benefits. The premiums paid by 500 people over 40 years will more than cover the cost of providing benefits to the 125 who may need benefits.

Learn More: Disability Insurance Cost

Downsides of group disability insurance

It may seem redundant to own an individual policy if you already have group coverage. But frankly, this couldn't be farther from the truth. In fact, the only time you should rely solely on group disability insurance is if you are unable to qualify for an individual policy.

Yes, participating in a group disability insurance plan is a good way to supplement your coverage at a reasonable cost. But you should also own an individual policy to ensure that you have adequate coverage in the event you need it.

That's because there are a number of downsides to group disability insurance that can leave you with inadequate benefits if a condition affects your ability to work.

Let's take a closer look.

You can lose coverage with a group disability policy

The biggest downside of a group policy is that it’s possible to lose coverage. This can happen in two ways.

  • First, this type of coverage is contingent on your employment or group membership. If that changes, you lose the insurance.
  • Second, companies and organizations conduct annual renewals of their benefits, including group disability insurance. Upon these reviews, there is no guarantee the plan will be renewed. Group policy sponsors can simply decide not to continue offering long-term disability insurance.

When you buy an individual policy, you own it for as long as you pay the premium. Plus, the amount you pay is generally locked in. It will not change unless you opt for more coverage.

Individual plans are also portable. You don’t lose coverage by changing jobs, losing your employment, or canceling a group membership.

A group plan may not provide enough benefits

In general, group disability policies replace about 60 percent of your income. Group plans may also place a cap on benefits. That means if you earn a higher income, your disability benefits may cover much less than 60 percent of your income.

Another thing to keep in mind is that a group plan usually only uses your base salary to determine your income. It may not include bonuses and commissions. Therefore, if you earn a significant amount from these sources (say, as a salesperson), your disability benefits will fall well short of 60 percent of your income.

An individual disability policy enables you to elect a benefit amount that covers a higher income percentage based on how much you can afford to pay in premium.

Another area where group plans typically fall short is the lack of optional riders.

Individual policies include optional features to enhance your coverage. Though they usually add to a policy’s cost, riders help customize your insurance to fit your needs and preferences.

Group disability insurance policies typically do not offer riders. Some of the value features you may miss out on with a group plan include:

  • Residual disability rider. This disability rider may provide benefits if the insured can still work following a disability but is not considered totally disabled. It is designed to protect you against partial income loss. The impact of disabilities isn't simply black-and-white; this rider helps account for the grey areas.
  • Future increase rider. This disability rider enables you to increase your coverage amount at designated future dates. Plus, you can do so without going through underwriting again. This may occur at certain ages, after major life events, if your income increases or if you lose group coverage.
  • Cost-of-living adjustment (COLA) rider. A COLA rider will increase your benefit amount each year you are disabled. This is done because your cost of living will likely increase annually due to inflation.

Learn More: Disability Insurance Riders

A group plan may not cover all types of disabilities

The most important feature of any disability insurance policy is its definition of disability.

A policy’s definition of disability is based on your capacity to work. Maybe you’re unable to work in your chosen profession, but can do other work. A disability may allow you to work in a reduced capacity. Serious ailments can prevent you from working in any job.

To collect on a claim, you must meet the policy’s definition of disability. This can vary greatly by company and policy. The broader the definition, the more insurance will cost.

Policies will mostly define disability in one of four ways:

  • Any occupation
  • Own occupation
  • Modified own occupation
  • Transitional own occupation

An any-occupation definition of disability means you are ineligible for benefits if you can work another job. Many group policies use this definition to determine benefits.

If you work in a highly-skilled, high-paying job, this type of coverage will not be sufficient. That’s because a number of disabilities can prevent you from working in your chosen profession yet enable you to work in a lower-paying job. The bottom line is that with an any-occupation policy, any work you can perform will make you ineligible for disability benefits.

The opposite of an any-occupation definition is an own-occupation definition of disability. This is a policy that protects your ability to work in your given profession. You will be covered if a disability prevents or limits you from working the job you had before your event. Even if you’re able to work in another capacity, you are still eligible for benefits.

You may also collect on an own-occupation policy if you have to work fewer hours because of a disability, or if there are some tasks of your job you can’t perform.

Modified own-occupation policies define disability as the inability to perform any job. How it differs from an any-occupation is that you will receive benefits if you choose not to work. An any-occupation policy will deny claims if you could work but choose not to. This definition is usually found in employer-sponsored group long term disability insurance plans and low-cost individual contracts.

Transitional own-occupation is similar to own-occupation coverage. The difference is how benefits are impacted if you work in another occupation following an injury or illness. A transitional own-occupation policy limits your benefits based on the difference between your total disability benefit amount and post-disability income.

Own-occupation provisions are rarely included in group policies.

Advantages of group disability insurance

Despite the clear downsides of group disability insurance described above, it does have its advantages over individual coverage.

For starters, group disability insurance is almost always going to be cheaper than individual disability insurance. Yes, that's because the coverage is less beneficial to the policyholder. But depending on your individual financial and health circumstances, that may be perfectly acceptable. Maybe you already have a substantial financial safety net and the group coverage provided by your employer is just a bonus. Or maybe your spouse is the primary breadwinner and he or she already has a strong individual disability insurance policy in place.

Group disability insurance also gives people who may not qualify for individual coverage (due to pre-existing conditions or other reasons) the opportunity to at least get some form of income protection in place. Because the reality is, not everyone can meet the eligibility requirements to purchase an individual plan from a private insurance company.

Last but certainly not least, group disability insurance can be a valuable tool for employers. If you have 10 or more employees, integrating group disability insurance with the other benefits you offer can help you become more competitive when recruiting and hiring top talent. It can also help foster greater employee satisfaction and retention by creating a company culture where people feel valued and protected.

Related: 20 Best Employee Benefits 2022

The bottom line on group disability insurance

Group plans generally offer lower benefit amounts than individual policies. Also, your ability to have coverage is contingent on being employed by the company or a member of the organization sponsoring the group plan. If that changes, you lose your coverage. There is also usually an annual renewal process for group plans and there is no guarantee that the employer, organization, or even the insurance company will renew the group coverage.

However, if you can obtain a low-cost or no-cost group plan, you should consider signing up for coverage as a way to supplement an individual policy.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published July 28, 2019
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