Why Pay for Individual Disability Insurance?

One of the most common questions surrounding disability insurance is, “If I have a group disability insurance plan why would I need to buy my own disability insurance outside of my employer sponsored plan?”

Well, I'm not suggesting that you always should but I am suggesting it's something you need to weigh objectively because it's just too important not to do the investigation.

You really have nothing to lose by doing the comparisons.  After doing the research and comparisons, you'll decide one of three things:

  1. To buy into the group plan
  2. Buy your own private/individual plan
  3. Or you will decide to enroll in the group plan and lay over a smaller private disability insurance policy to cover the gaps in your group coverage

I suppose we should dig a little deeper into both types of coverage so that you can see the real difference between the two.

The most common misconception surrounding group disability insurance is that it provides comprehensive and thorough protection for a disability.  Conversely, there is a misconception that individual/private disability insurance policies are way too expensive for most people to afford and why bother when they already have a group plan at work.

Big problem!

Of course it is highly likely that an individual policy will cost you more than a group policy but a private plan will also provide a much more generous benefit in a more liberal way than a group policy will.

Think about it from this angle.

If you were in the market to purchase a new house and you came in my neighborhood (which currently has a gracious plenty of houses for sale) looking for your new house, you would find two houses for sale that I can see from my front porch.  The two houses are almost identical in square footage and neither is particularly offensive to the eye, i.e. no hot pink shutters or bushes covering the front of the house.  In other words, I would characterize their curb appeal as almost identical; both very nicely landscaped and well kept.

However, you notice that one of the houses is listed for $200,000 and the other is listed for $65,000.  Wouldn't you be asking yourself, “So, what's wrong with the house listed at $65,000?”

Of course you would.  And you would be wise to do so.

If you actually got out of your car and walked around to the back of the house listed for 65k, you'd discover that the back half of the concrete slab foundation has separated from the front half and the back portion of the house is sitting a full 4-6 inches lower than the front.  Oops!

disability insurance

If you look at Brandon's post from earlier this week, he commented that if you “love”(airquotes) contract law, you'll surely love disability insurance.  Well, he was being 100% sarcastic and completely truthful at the same time.

As usual, the devil's in the details.

So let's apply this same line of thinking to disability insurance.

Your employer's group plan is gonna cost you $1,200 per year and it's gonna cost you $5,000 per year to purchase your own individual disability plan.  Why are you skeptical of the one that has a premium of $5,000?  Because generally speaking people have no clue how much a high quality disability insurance policy should cost.  We all know what a quality house should cost in a given neighborhood.

It should come as no great shock to you but group plans are significantly more profitable for insurance companies than are private plans that you would purchase on your own.

How is that you say?

Pretty simple actually.

If they're not charging as much in premiums, they'll just put really limiting restrictions on the benefits that are actually paid.

Insurance is really a game of using common sense and disability insurance in particular is no exception.  You have to look beyond the actual premium outlay and view a policy based on the value that it provides to you and your family in exchange for the cost.  You can’t just view the premiums in a vacuum.

I think we could all agree that a policy that actually pays you when you need the money is always a better deal than one that refuses to pay you but costs you less for the privilege in the meantime.

In its purest form, disability insurance was created to insure your income, which is probably your most valuable asset if you really think about it: your ability to earn an income over your lifetime.

If a group disability plan is the only type of protection you have, you are leaving your family standing in the rain with one very small umbrella.  Parts of you will be dry and parts of you will be soaking wet.

Surely there are some pros to a group plan?

Well for starters, they usually don't require you to be medically underwritten–which is nothing to sneeze at for sure.  In fact, this maybe the single greatest advantage of any group plan.  Unfortunately, this is most definitely the greatest weakness of group plans as well.

Let me explain.

If there is no medical underwriting for people to get the coverage, then that means the insurance company that issues the coverage is obligated to cover everyone in an employer group.

So what's wrong with that?

Well, that means that lots of people who would otherwise not be eligible for disability insurance are now covered.  People who are not insurable in any other way are not covered at the same level as everyone else inside the plan.

Remember what I said about using common sense?

It applies here.

The insurance company is going to be profitable.  They have to make a profit to stay in business. So, the only way for them to create a policy that will cover anyone and everyone is to make the benefit payouts very limited.  Beware of this as it is a big gotcha in your group plan!

And typically speaking, the employer's only consideration when looking at plans is cost.  They realize that they have to offer some coverage but you can rest assured they are going to do it for as little cost as possible.

What’s worse is that most people sign up for their disability insurance coverage after spending five minutes with the benefits person (group insurance salesperson) in the company break-room.  The employee just blindly take the benefits without ever doing any digging into the quality of what they're purchasing.

For employers the end and the beginning of their research was the cost of offering the benefit.  That's it.

The Big Gotcha for Group Disability Insurance

Perhaps the biggest concern I always have for folks who tell me confidently that they are covered by their group plan is that they never understand what the maximum benefit payable under their contract is.

In other words, if you are disabled, how much of your compensation will be covered?  Typically a group long term disability policy will cover up to 60% of someone’s base salary, up to a predetermined cap.

Keep in mind that group disability insurance is written for the lowest common denominator on the payroll.  Most plans will have a specific monthly cap ($5,000, $7,500, $10,000) you get the picture.  So, the people on payroll that make say $210,000/year will still only be covered up to that monthly cap. You can obviously see why a group plan makes no sense for them.  Evidently when it comes to ERISA, discrimination rules don’t exist to protect everyone, just those who are not considered highly compensated.  Arbitrary at best in my opinion–to hell with those evil rich people.

I’ve really just scratched the surface of the differences between group disability insurance and private disability insurance.  There are other issues such as, portability, inflation protection, partial vs. total disability, guarantees, and last but certainly not least—offsets for social security, retirement plans, workers compensation etc.

Just be aware of what you’re paying for.  And as always if you’d like help with your plan, feel free to contact us and we’ll be glad to help.


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