Disability: Group vs Individual Plans

Whether individual or group disability insurance is for you will depend on your personal circumstances and the details of the policies you’re being offered. It’s imperative to look at the benefits side by side when comparing an individual versus a group disability insurance policy. Following are five areas you’ll want to compare.

Cost

In general a group disability insurance policy is less expensive than an individual policy. Why? Often group policies are offered by your employer at no cost to you. Similarly, many employers offer group disability insurance as part of a cafeteria plan for which you can pay with pre-tax dollars. In general, with the risk spread over more participants, the cost of group disability is less.

However, group insurance premiums generally can increase as your company renews its coverage periodically. An individual policy’s monthly premium stays the same.

Benefits

One of the reasons the cost of group disability insurance is less is because benefits are often less as well. These are generalities, but will give you areas to look at for comparison. Often, group policies take longer to begin paying benefits when you are disabled and the benefit payments don’t last as long.

With a group policy, the amount of monthly benefit to which you are entitled can rise with your salary (as does the cost). With an individual policy, the benefit is set when the policy is issued and doesn’t change.

Disabilities Defined

It is vital to understand what is meant by “disability” when comparing an individual and group disability insurance policy. Often, you must be 100 percent disabled and unable to perform your specific occupation to collect on a group disability policy. Individual policies often will pay on a percent of disability.

As an example, assume your maximum monthly disability payment on an individual policy is $5,000, and that you are confirmed as 60 percent disabled. Many group policies would pay nothing. Many individual policies would by $3,000 a month, or 60 percent of the max.

Further, many group policies quit paying after a given time if you can’t work in your occupation but can work in another. Individual policies are more often broader, continuing to pay if you are disabled in your field, even if you work in another.

Portability

As we have become a more mobile workforce, the portability of benefits is important. Group disability insurance often terminates when your employment does.

An individual policy is yours and goes with you wherever you work. (Bear in mind, certain dangerous occupations could be excluded.)

Taxation

If your employer pays for your group disability insurance, benefits are taxable in the year you receive them. If your group policy is paid for by you with pre-tax dollars in a cafeteria plan, the benefits are taxable. 

With your individual disability insurance policy, as long as you pay for it with after-tax dollars, the benefits are not taxable to you.

The examples speak generally about individual and group disability insurance. Each policy will have specifics unique to it that can affect the cost and the benefit.

Key words: group disability insurance

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