27 May Group vs. individual disability coverage

Q. My company offers a disability policy and I know group is supposed to be cheaper than getting one on my own. How can I compare them?
— Looking for coverage

A. Disability insurance is important. It will replace a percentage of your income should you be unable to work.

But comparing a group disability policy to an individual plan is a lot like comparing apples to oranges. They are not the same and it’s tough to do, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

For starters, he said, group plans will always have caps on the benefit amount you can purchase – so depending on your situation this may or may not be enough to cover your basic living expenses should something happen to you.

DeFelice said if your employer pays your premiums the amount you receive will be taxable income to you, so you will receive less than what is stated in your benefits package.

With an individual policy you receive a tax-free benefit as long as you do not take the deduction for your policy premiums, he said.

Group plans will also always have income offsets while individual plans do not.

“What this means is the group carrier will reduce the amount they pay you if you receive disability benefits from any other sources,” DeFelice said.

He said group policies will force you to qualify for Social Security disability benefits, and if you get declined the first time around they will make you file a second time and appeal the decision. If you do receive Social Security disability, the group carrier will reduce your benefit by the amount received. This will also be the case if you have a worker’s compensation claim, which covers you when you are injured on the job, he said.

“If you receive workers comp benefits, your group carrier will reduce what they pay you by the amount you receive,” he said.

Group carriers can also go after any lawsuit settlements.

DeFelice offered this example: Let’s say you are in a car accident and miss two years of work. During that time, you collect $15,000 per month from your group disability policy, but then you receive a $1 million settlement after a long litigation.

You’re rich, right? Not so fast.

“Approximately 40 percent goes to your attorney, leaving you with $600,000. Then your group DI carrier collects $360,000 on that settlement for the $15,000 per month they paid you for 24 months – leaving you with $240,000,” DeFelice said. “None of the above would occur with an individual policy that does not offset for additional income sources.”

Most important, though, is the fact that most group policies do not provide you with the true “own occupation” definition of disability – which dictates how and when you get paid benefits.

DeFelice offered this example of how an individual disability contract definition of total disability reads:

“You will be considered totally disabled if you cannot perform the material and substantial duties of your occupation. If you become totally disabled from your regular occupation and choose to work in another occupation, you’ll receive full benefits, regardless of the income you earn from the other occupation.”

DeFelice said although the term “own occupation” coverage gets thrown around very liberally in group disability insurance marketing material, you really have to dig deeper into the policy itself to determine the true definition.

He offered this example of a common total disability clause found in many group contracts:

“You will be considered totally disabled if you are unable to do the substantial and material duties of your own occupation, and after 24 months you will remain fully disabled if you are unable to do any gainful occupation for which you are fitted by education, training, or experience.”

This is “own occupation” for only two years, DeFelice said. And there is a reason that the group contract does not say “and experience,” he said.

By using “education, training, or experience,” the carrier has already made the case that a litigator who develops a speech impediment or loses the speed of his cognitive abilities that allow him to think on his feet in the courtroom is still perfectly qualified to teach LSAT prep courses based on his education, and therefore would not receive disability benefits to offset the loss of income he would endure if he couldn’t do his job anymore, DeFelice said.

The important thing to remember about a disability contract is that words matter, DeFelice said, noting that even the smallest words mean something and we have a tendency to gloss over them.

He said any group policy will always have more restrictive language than what you will find in a high quality individual policy.

“When claims don’t get paid people will argue that the insurance carrier is exploiting a loophole in the contract – but I’m going to suggest that there aren’t any loopholes in insurance contracts,” he said. “In the example, above the carrier is just following the language they wrote into their contract – and priced accordingly.”

You, as the consumer, simply get what you pay for, he said, and there is a reason why individual coverage is always more expensive than group rates.

If you had to file a claim, which of the two definitions listed above would you rather own?

DeFelice said when comparing individual to group coverage, you need to ask the human resource person at work for the sample policy certificate. This is what will state the specific terms and definitions in that group contract – not the HR benefits packet you receive when you enroll.

“HR doesn’t explain this stuff – not because they don’t care about the employees but because they aren’t trained to read complex contract language and they usually don’t understand the difference,” DeFelice said. “You need to bring your group policy certificate to an insurance professional who can help you evaluate the differences and trade-offs between group and individual coverage to help you determine which is worth doing.”

Maybe group is all you can afford, DeFelice said. Maybe a little bit of both is the answer. At least you will be in a position to make an educated decision.

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This post was first published in May 2016.