Disability insurance pays a benefit to you when you can’t work. In a country where about half of people are living paycheck to paycheck and have less than $500 in savings, disability insurance is a crucial benefit for employees to secure their financial wellbeing.
If a group is interested in disability insurance, they need to understand some basics of the coverage. While not complicated, a disability insurance quote can look like a foreign language if you don’t know what you are looking at.
How Does Group Disability Insurance Work?
Disability insurance is one of the most valued employee benefits after health insurance, and there’s good reason for it!
Roughly one in four employees will make a claim for disability insurance benefits in their lifetime. As a result, disability insurance is a coverage that every company needs to offer for a well-rounded employee benefits package.
Disability insurance can vary by carrier and contract, but has a few basic qualities, namely:
What is considered a disability?
When will you receive benefits and for how long?
How are benefits calculated?
Definition of Disability
A group disability insurance policy must define what is meant by “disability.” Each policy can carry one of a few common definitions. The appropriate definition of disability depends on your job, income, and how much you are willing to spend.
Definitions you may see include:
Any Occ Definition: You are unable to perform a job that is reasonably suitable for yourself based on your education, experience, and age.
This is the narrowest definition and while it can carry the lowest cost of insurance, it can limit your ability to make a claim even if you aren’t able to perform your job.
True Own Occ: You are unable to perform the material or substantial duties of your primary occupation, even if you are earning an income doing another occupation.
This is most common for highly trained individuals such as surgeons, attorneys, and other uniquely trained professionals. This is ideal in situations like a surgeon who develops a tremor to become an educator or an attorney who can no longer appear in court but can draft, review, and counsel transactions.
Modified Own Occ: Typically similar to own-occupation except you are also not working. There may also be a period of true own-occ for a period of years before the definition transitions to an any-occ definition.
The modified own-occ definition is common for group disability insurance policies for office employees and other professionals. It offers good protection at a reasonable cost, however it may not be appropriate for the highest earners at a company.
Waiting Period: When will I get paid?
If you meet the definition of disability under your contract, you’ll receive benefits once you’ve met the waiting or elimination period on the policy. This is typically 90 or 180 days, and sometimes 365 days, so as to align with the short-term disability insurance offered by the employer or with what’s available from the state, such as in California.
Benefit Period: How long will I receive benefits?
Once you go on a disability insurance claim, you’ll receive monthly benefits as long as you meet the contract’s definition of disability until you either return to work or meet the end of the policy’s benefit period.
The benefits period is typically a future age, such as 65 or 67. If you are in your 60’s when you become disabled, your policy will state a period of months you receive benefits, such as 36 months if 63, 24 months if 64, 12 months if 65, etc.
Benefits Formula: What are you receiving?
How much benefit you receive will depend on a benefits formula found in your group disability insurance contract. If you have an individual disability insurance policy, you will receive a stated benefit in monthly income, such as $500 or $3,000.
Group disability insurance pays you a percentage of a definition of earnings, such as total Box 1 earnings on your W2, total salary, salary plus bonus and commissions, or others. It can be the case that some employees suffer a significant disability income gap due to a particular definition of earnings, so you should always review exactly how earnings are defined in a contract.
Other notes about group disability insurance
While the above items cover important aspects of your group disability insurance, don’t forget to consider tax implications, portability, and limitations and exclusions.
How are my group disability benefits taxed?
For the most part, the IRS will get paid today or tomorrow. Hopefully not in both cases, but this rule of thumb serves us well when it comes to the taxation of disability insurance benefits.
Many times, companies deduct the cost of disability insurance when they file, which means the benefit from that contract will be taxable to any participant who makes a claim.
If, on the other hand, a company or the covered employee pays the premium with after-tax money, the benefit will be received tax-free. This is similar to what happens with benefits being tax-free when received from an individual disability insurance policy.
Portability: Can I take my coverage with me?
In most cases, you cannot take group disability insurance with you when you leave your employer. In the cases where a policy is portable, you will need to prove you are in good health or else the carrier would decline to continue your coverage.
Limitations and Exclusions
Because group disability insurance does not require underwriting in most cases, the insurance company will attempt to limit it’s exposure and people waiting to sign up until they have a condition through a provision called Pre-Existing Exclusions. If you enroll for disability insurance with your employer after you’ve begun seeing a therapist for a back sciatica, then try to make a claim, your carrier will deny the claim as a condition you had when you first enrolled.
As is always the case with any insurance policy, the best time to get covered is before you need it!
Additionally, some policies today limit benefits to a shorter benefit period for certain conditions, most commonly mental health-related causes such as depression or anxiety that prevents you from working or reduces your income.
Group disability insurance is a crucial employee benefit and highly valued by employees, particularly the high-earning and experienced employees that a company depends on for it’s continued success and growth.
You should work with your benefits advisor to match the design of your policy with the needs of your employees. Your best benefits plan will provide the right amount of coverage at the right price, in a way that increases engagement and retention of the talented workforce that makes your business thrive.