Group, Individual, or Both? Making Sense of Your Disability Insurance Options

wheelchair user

If the global COVID-19 pandemic hasn’t prompted to you take a closer look at your insurance yet, now is the perfect time to do so: 2021 open enrollment begins November 1.

Health insurance is likely the first and most important consideration that comes to mind. But it’s certainly not the only key decision that needs to be made, especially in light of recent events. As the pandemic has demonstrated firsthand, the unexpected can strike at any time.

That’s where disability insurance can offer protection from serious financial hardship. It’s designed to replace a certain amount of your pre-disability earnings if a covered injury or illness prevents you from working and earning an income.

While you do have until December 15 to explore your options, now is not the time to waver. Here’s what to consider when it comes to your disability insurance needs moving forward.

Group Disability Insurance is Nice to Have — But it Has Major Limitations

If you have access to an employer-sponsored group disability insurance coverage, it usually makes sense to take it. In most cases, employees can participate in their employer’s group disability insurance plan at little to no cost. Bureau of Labor Statistics data from 2018 shows that employers paid the full premium amount for 85% of workers with short-term coverage and 94% of workers with long-term coverage.

But that doesn’t mean all of your income protection needs are met.

For one, group disability insurance plans typically place a cap on the benefit amount that can be paid out if a claim is filed. For high-income earners, this means benefits will likely be insufficient if you need to rely on them someday. Further complicating the picture is the fact that group disability plans only account for your base salary, leaving out any commissions and bonuses you earn. What’s worse is that any benefits you do receive you from a group disability insurance plan will be taxed.

Your coverage also depends on your employment. That means if you switch companies, you lose your coverage, period. And even if you stay with the employer providing you coverage, the company can simply decide to cancel the policy instead of renewing it.

Individual Disability Insurance Provides Personalized Income Protection

Where group disability insurance comes up short, disability insurance for individuals picks up the slack. Purchasing an individual disability insurance policy can plug the holes in your employer-sponsored group coverage, or make up for the absence of group coverage altogether.

Think of your individual disability insurance policy as personalized income protection. In exchange for the monthly premium amount that you pay, you receive coverage that is tailored to the specific needs and risks associated with your lifestyle. Better yet, the shortcomings associated with group coverage are nowhere to be found.

When you apply for individual disability insurance coverage, your policy’s benefit amount can be increased to more accurately reflect your total net income. This allows you to factor in commissions and bonuses that you earn — a crucial benefit for certain professions, such as sales.

Furthermore, if you become disabled and need to file a claim, any benefits you receive will be tax-free. That’s because your monthly premiums are paid with after-tax dollars.

Perhaps the most important advantage of having individual coverage is the fact that your policy is portable. As long as you continue to pay your premiums on-time and in-full, your individual disability insurance policy goes with you, too.

Key Takeaways

Disability insurance probably isn’t at the top of your to-do list right now, but it definitely needs to be on it somewhere. With open enrollment beginning next week, and the pandemic showing no signs of ending anytime soon, now is a smart time to evaluate your coverage needs.

In doing so, remember:

  • Employer-sponsored group disability insurance coverage is nice to have and should not be neglected; however, it does have plenty of shortcomings to watch out for.
  • At the same time, owning an individual disability insurance policy can provide the maxmium amount of income protection available based on your unique financial needs.

If you’re offered group coverage through your employer, carefully review the details, get your questions answered, and take advantage of this plan if it makes sense. And if not? That gives you all the more reason to look into purchasing an individual disability insurance policy.

That way, you can enjoy peace of mind knowing you’ve protected as much of your income as possible.

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