Group Disability Insurance

The basics of group disability insurance

Group disability insurance is a single disability policy that covers many people (a group). The insured group has a common interest or association, such as an employer, a trade, or a school affiliation. All eligible individuals may be covered by the policy, and the cost of group coverage is often less expensive than the cost of individual coverage. The plan may be contributory (you must sign up for coverage and contribute toward the premium payments) or noncontributory (funded by the employer or association, and you are automatically covered if you meet eligibility requirements).

When you apply for group disability insurance, you are not issued an individual policy, nor are you evaluated for coverage as an individual. Instead, the policy is issued to the organization or company that represents the group (the master policyholder). The individuals within the group that apply for disability insurance are issued certificates of coverage rather than individual policies. These certificates are proof that coverage exists, and they contain information about the amount and type of coverage provided.

Instead of paying premiums to the disability insurance company, you pay them directly to the master policyholder (if this is your employer, often through payroll deduction). If you pay either part or all of your premium cost, your group plan is said to be contributory. If the master policyholder (e.g., your employer) pays the entire premium cost, the plan is said to be noncontributory. For the plan to remain in effect, most or all of the group's members must want to be included and have coverage. If the plan is noncontributory, 100 percent of eligible group members must be covered by the plan. If the plan is contributory, usually 75 percent or more of eligible members must be covered by the plan. When enrollment levels drop, the group must find new participants from the eligible pool of members.

Eligibility rules

To be eligible for coverage under a group disability plan, you must meet the following requirements:

• You must be a member of the group: To be eligible for group disability coverage, you must be affiliated with, or be a member of, the group offering coverage.
• You must meet the eligibility requirements outlined in the group policy: Not all members of the group may be eligible for group coverage. Although a group plan cannot bar an individual from coverage, it can bar a group of individuals from coverage until certain eligibility criteria, such as length of employment, are met.
• You must enroll: When enrolling in a contributory group disability plan, you must fill out and sign paperwork pertaining to the insurance contract.

Keep in mind that if you enroll during an open enrollment period, you may not have to prove that you are insurable (depending on the size of your group). In other words, you don't have to show proof that you are healthy or take a physical. However, if you don't enroll during an open enrollment period and later decide you want coverage, you may have to prove insurability at that point, or you may have to wait until the next open enrollment period.

Advantages of group disability coverage

Group disability policies often have fewer underwriting restrictions than individual disability policies. That's because the risk of disability is borne by the group rather than by an individual. A fairly large group will include mostly individuals who are good risks, as well as a few individuals who are poor risks. Even though individuals enrolling in a group disability plan will not have to pass a physical exam, they will have only a limited enrollment period to take advantage of this provision. This helps to prevent individuals with health problems from enrolling after they have discovered that they are sick.

Another big advantage of group disability insurance is that premiums are much lower than premiums for individual disability insurance policies because it's more cost effective to underwrite insurance for a group than for individuals.

Disadvantages of group disability coverage

"You can't take it with you" is a phrase that normally applies to group disability coverage. When you leave your job or otherwise terminate your relationship with a group, you can't take your coverage with you. In addition, you normally cannot convert it to an individual disability policy. This means that you may be left without disability coverage when you need it, and if you develop a medical problem, you may be unable to buy coverage for that pre-existing condition in the future. That's why if you know you're leaving your job, consider applying for individual disability coverage before you quit. Assuming that you are insurable, this will ensure that there will be no lapses in your disability coverage.

Another disadvantage of group disability insurance is that premiums can be raised periodically. For instance, association policies usually offer coverage that guarantees that the premium will not rise for one or more years. However, at the end of the guaranteed period, you may find that you have to pay much more for coverage (if the premium has been raised for the entire group).

Unlike individual disability policies, employer-sponsored group disability benefits will be reduced by payments you receive from workers' compensation, which covers many work-related disabilities; Social Security; and other government programs. In addition, your employer-sponsored group disability policy is likely to define disability as "any occupation" disability. This means that if you're able to work in any occupation (even one outside of your own area of expertise), you won't be eligible for disability benefits. Occasionally, however, group disability plans will incorporate the two definitions, paying benefits in the short term even if you're able to work in another occupation and paying long-term benefits only if you're completely disabled and unable to work in any occupation.

Generally, you'll have to pay taxes on benefits you receive from group plans, whereas individual plan benefits are generally received tax free.

Finally, group disability plans are less flexible than individual disability plans even though they may offer many of the same features. You may be able to personalize your policy somewhat by adding on a rider or two, but you won't end up with a policy that reflects your individual circumstances. Although both individual and group disability policies limit coverage to certain maximums based on income, group policies often do not consider deferred compensation and bonuses when determining the maximum benefit payable. This might hurt you if your earnings are not truly reflected through your salary. In addition, long-term group disability benefits are usually offset by other government benefits, which is generally not the case with individual insurance.

Employer-sponsored group disability insurance

If your employer offers disability insurance, it's likely a short-term policy. Short-term disability insurance contracts usually have short waiting periods (1 to 14 days) and are simple to apply for. Although some offer benefits for up to two years, many policies pay benefits for six months to one year. Long-term disability policies are offered less frequently by employers than short-term disability policies. You are more likely to find them offered at medium- to large-sized companies than at smaller ones. Most of these plans pay benefits up to age 65, although they may pay lifetime benefits in certain instances.

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