Shortfalls of Employer-Sponsored Group Long Term Disability Insurance

Edward Goldstein |

Your Income is not fully covered – A typical Employer-sponsored Long Term Disability Insurance only provides coverage for up to 60% of your BASE income up to a specified Cap that may not exceed $8,000 per month or $108,000 per year.  For example, suppose your base income is 100,000 per year, and typically receive an additional $30,000 in bonuses or commissions; based on the terms of your Group Policy, in this example, you may only qualify for $5,000 per month or $60,000 per year, leaving a base pay shortfall of $40,000 + bonus/commissions.   As you can see, those with higher income levels are greater exposed.  In these situations, a personal disability policy will supplement the loss of income gap, including bonuses and commissions.

Benefits are Taxable –  In addition to the potential income coverage shortfall above, most people do not realize that employer-paid Group Disability Income Benefits are fully taxable!  In essence, you will face a minimum of a 40% income reduction. On the other hand, individually owned and paid disability coverage benefits are 100% tax-free!

On-Going coverage is not guaranteed  Although you may currently have a group policy, your Employer-Sponsored plan can be canceled, changed, or modified, leaving you and your Income even more vulnerable.  

Cost of Living adjustments are non-existent – Employer-Sponsored Long Term Disability policies rarely include a provision to protect against the cost of living increases. However, individual policies offer a wide range of options addressing this shortfall risk. 

Coverage may not be portable – If you change jobs or elect to start your own business, you may not have the choice to bring your policy with you.  For those Group disability policies that are portable, they are expensive compared to individual policies due to limited or no Health Exam requirements.  With your own policy, a change in job, occupation, or even health changes, coverage will stay in force as long as premium payments remain current.

Group coverage is NOT True Own Occupation Based – Group disability coverage uses the expansive job definition, making it much more challenging to qualify for coverage and is not tied to your specific job tasks and responsibilities. Hence with group coverage, you must demonstrate a much higher inability to work in any occupation to qualify for benefits.  Furthermore, qualifying for Social Security Disability is notoriously even more difficult to navigate and qualify.   On the other hand, with your True Own-Occupation policy you may even be able to work in another profession and not lose benefits.

No Partial Disability Coverage -  Individual disability insurance policies also allow for partial disability riders that can provide prorated benefits if you are only able to work part-time, while group disability does not typically cover such a situation.

The bottom line is that while receiving group disability insurance is an excellent start, would you be able to maintain your current lifestyle and continue making mortgage payments with a Pre-Tax 40% income reduction?   As I am sure you can imagine, personal disability policies vary by issuer and occupation and are very customizable across selected monthly tax-free income benefits, length of coverage, selected elimination period, and many optional Riders such as Cost of Living Adjustments (COLA), partial disability benefits and others.

If you are interested in exploring potential solutions based on your situation, please don’t hesitate to contact me.

Edward C. Goldstein, CFP®, MBA, President
Financial Life Planning, LLC
10,000 Lincoln Dr. East, Suite 201
Marlton, NJ 08053
Phone: 856-988-5480
Fax: 908-292-1040