When considering financial security, one important factor often overlooked is the role of disability insurance. If you’re currently covered under a Group Long-Term Disability (LTD) plan through your employer, you may be asking yourself if it’s necessary to buy individual disability insurance as well. The answer depends on several key aspects of your existing coverage.
- Understanding the Payout Amount
The first step in this decision-making process is to understand exactly how much your Group LTD plan pays out. Some people are surprised to learn that their coverage provides less than expected, and this discrepancy is often discovered only at the time of claim. The calculation of benefits varies from one policy to another. For instance, based on an income of $115,000 per year, a plan that provides 70% of the first $2,997.54 of your monthly earnings plus 50% of earnings above this amount results in a pre-tax monthly benefit of approximately $5,391.
- Consider the Tax Implications
The tax implications are a significant factor when determining the actual payout. If your employer funds the premium, the benefits you receive will be taxable, effectively reducing the amount you receive each month. Unfortunately, this is often overlooked by many. It’s crucial to understand your net income after these deductions.
The carrier will use an assumed tax bracket based on your income. For example, a carrier may assume that someone who is earning $115,000 per year will be taxed at 40%. This means they will convert your Group LTD Taxable benefit into a Tax-Free benefit and assume that you will only be receiving $3,235 per month after-tax.
Obviously, someone who is earning $115,000 will be taking home more than $3,235 per month, therefore an individual plan to supplement their Group LTD policy is very likely warranted to cover the gap. In this scenario, one could purchase an individual policy for $2,500 per month, which will be paid out in addition to their Group LTD plan in the event of a claim.
- Definition of Disability
The specific definition of disability according to your policy can play a critical role in determining eligibility for claim. Most Group LTD policies have “Regular or Own Occupation” for the initial 24 months, evaluating the claim based on your ability to perform your current job duties. However, after 24 months, the policy may shift to an “Any Occupation” definition, potentially allowing the insurance company to terminate the benefits if you can work in any gainful occupation, possibly at a much lower pay rate.
Some with Group LTD may decide to purchase an individual plan to provide better coverage due to the stronger contract that an individual policy can provide.
- Portability of Your Policy
Portability refers to whether your coverage moves with you if you change jobs. Most Group LTD plans aren’t portable, which means if you leave your current job, you lose your benefits. If you have any pre-existing health concerns at that time, obtaining an individual policy could prove challenging.
Some individual disability policies will allow you to increase the coverage in the future, without any medical underwriting, to keep up with salary increases. In addition, there may be an option to increase your coverage in the event you lose your Group LTD, allowing you to essentially replace your Group LTD coverage with individual coverage. In my opinion, this feature alone makes having a small policy worthwhile as you are locking in today’s health, allowing you to purchase coverage in the future if you experience a change in your group disability plan.
- Defining Earnings
How your policy defines earnings also impacts your coverage. Some Group LTD plans only consider base salary as insurable income, leaving out income from overtime, bonuses, or commissions. Understanding this definition can provide clarity on your actual coverage level.
- Policy Maximums
Finally, be aware of policy maximums, particularly the Non-Evidence Maximum (NEM). This is the maximum coverage you can have without providing medical evidence of good health. If you fail to provide such evidence, your coverage will be limited to the NEM, which may be significantly less than expected.
If these points reveal gaps in your coverage or potential issues in the event of a claim, it may be prudent to consider supplementing your Group LTD with an individual policy. An individual policy can provide more comprehensive coverage, stronger contractual protection, and offer greater stability in the face of career changes or pre-existing conditions.
In conclusion, while Group LTD benefits are valuable, they might not fully cover your needs in the event of a disability. It’s essential to engage a broker specializing in disability insurance to help understand your options better.
Your income is one of your most important assets; ensure it is appropriately protected.