Disability Insurance Rates Are a Function of Type of Policy You Choose

Perhaps you’re starting to see the wisdom behind long-term disability! But what are the options for coverage?

There are two kinds of disability insurance: group and individual.

Desiring to protect employees, an employer usually purchases group insurance, whereas when protecting themselves, people typically purchase individual plans.

Both should play a part in a well-designed benefits program.

Group Disability Insurance Plans

Many companies, particularly those with large numbers of white-collar workers (high tech firms, banks, etc.), purchase group insurance, the most common type of coverage. [If you'd like a review, we discussed the basics of Group LTD here... what follows is a very simple thumbnail summary of group provisions.]

Typically, group disability plans begin to pay an employee income after s/he has been disabled for some period of time -- most frequently 90 days.

The amount of the benefit is usually 60 percent of compensation starting from the 90th day of disability until normal retirement age (from age 65 to 67, depending on when the employee was born).

It normally (but not necessarily) excludes commission, bonuses and overtime. It’s offset dollar-for-dollar by any Social Security the employee receives, and it’s generally not adjusted for inflation.

Because it’s group coverage, it’s easy to issue. The carrier doesn’t require any evidence of insurability.

In fact, if the employer is paying the premium, there aren’t even any forms for employees to fill out — the employer sends in the application, the first month’s premium check, and a list of employees and their social security numbers.

And because it’s group insurance, it’s also cheap. Granted, the price goes up as the employee base gets older, but it’s still a fraction of a percent of the total salaries of the covered employees (about a quarter to a half percent).

Individual Disability Insurance Plans

Individual disability coverage is a whole different breed of cat. It’s issued on you and you alone: the amount you can purchase is a function of your current income and health profile.

They don’t care about your Social Security benefit — the amount they write is the amount they’ll pay if you’re disabled. It can cover your full income, including bonuses, commissions, etc.

It will even replace your employer’s share of 401k contributions. The benefit can be tied to inflation, and you can lock in the ability to add coverage as your income grows, despite your future health condition.

And because it’s individual coverage, it’s expensive. It costs about five times as much, per dollar of benefit, as group coverage.

However, remember that the premium stays the same until retirement, no matter how far away. And because the employee -- not the employer -- is paying the premiums, the benefit is income-tax-free when received.

But because it’s individual disability, it’s harder to get. After all, they’re locking in the price irrespective of what happens to your health in the future. So they underwrite when you purchase the policy, requiring physical exams, blood and urine samples, income verification, etc.

Can You Have the Best of Both Worlds?

Why not?

Must individual coverage be divorced from any employer involvement? No.

In fact it makes sense to get employers involved! And if you are the employer, it makes sense to offer individual disability in addition to group coverage. It needn’t cost you anything (zero, nothing, zilch, nada, niente) to offer this extra benefit.

Here’s why a combination of group and employer-sponsored individual disability makes sense.

First, if three or more employees are purchasing individual policies to be billed through the employer, they typically get a 15 percent discount from the price they’d pay on their own.

Given the relatively high price of individual disability coverage, this reduction is significant.

Second, the maximum allowable monthly benefit is higher with a combination of group and individual than it is for either alone. That's because the individual insurer assumes that the underlying group disability contract will be

Reduced by the amount of Social Security the employee receives.
Reduced through taxation

As a result, the DI individual carrier will write a larger policy than they would if they didn't make the reduced-benefit assumption.

Third, if enough employees purchase coverage, the carrier will often give underwriting concessions. They may accept someone that they wouldn’t accept on a stand-alone basis, or they may write policies smaller than $1000 per month without physical exams.

“Employer-sponsored” doesn’t mean the employer pays, just that the employer collects the premium from the employees and pays it over to the insurer.

But even if you, Mr. Employer, don’t participate in the cost of the plan, your employees will still benefit. Without your sponsorship, they couldn’t get that 15 percent discount. Everyone wins.

So why is long-term disability still so under-represented in the workplace? Partly because of a lack of demand. Sorry, America, but you don’t do nearly enough planning ahead or worrying about the really important things.

The second reason is that disability plans are confusing and difficult for the benefits person, office manager, CFO, or human resources person to design and implement properly. And the third reason is that companies without plans often assume they cost a lot more than they do. (Actually, they’re quite inexpensive.)

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