Group vs. Individual Disability Insurance

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

As we get older, we have a greater risk of becoming disabled and not being able to work and earn an income. In this lesson, you will learn more about group and individual disability insurance.

What Is Disability Insurance?

Let's meet Ms. I. Fell, a single mother who has a full-time job. She spoke with a friend last week who has been off work for three months with a back injury. Her friend told her how relieved she was to have disability insurance. Ms. Fell is wondering if she should purchase disability insurance as well. But she isn't sure what it is or whether she should get her own policy or sign up through her employer. Let's see if we can help Ms. Fell with this decision.

Disability insurance is a type of insurance that protects you if something happens that results in your being unable to work and therefore unable to pay your bills, such as your mortgage or rent. A disability could include an illness or an injury that affects your ability to work for a period of time. Your employer could offer disability insurance as a group insurance plan or you could purchase an individual plan for yourself.

Disability insurance plans pay you a percentage of your current income while you're off work. The percentage varies depending on your plan, but most plans replace between 60% and 80% of your income. The amount you receive may be taxable and this will depend on who (either you or your employer) is paying the premium or the cost of the policy . Let's examine group and individual disability insurance in more detail.

Individual Disability Insurance

Ms. Fell could purchase an individual disability insurance policy where she owns the policy and pays the premiums. One advantage of buying this policy herself is that her policy would continue even if she were to leave her current employer. She would also have more flexibility about the type of plan to purchase, as she is the one who is paying the premiums.

For example, she could decide what percentage of her income the policy will replace and the qualifying period or how many days she must wait after the date of disability before her policy starts paying her. Since she is paying the premium for the policy, tax would not be payable on the money she receives from the policy.

One disadvantage of an individual policy is that it would be more expensive for Ms. Fell than a group policy. In order to qualify for an individual disability insurance policy, Ms. Fell would have to answer some medical questions and she may have to submit a medical examination depending on her age.

Group Disability Insurance

Most employers offer group disability insurance for their employees and there are typically three levels of coverage:

  • Sick leave
  • Short-term disability
  • Long-term disability

Sick leave provides an employee with coverage if he or she has a short-term illness.The employee usually doesn't pay sick leave. Ms. Fell's employer may also provide short-term disability that would start after she has used up her sick leave benefits. Short-term disability payments are made for a certain percentage of an employee's income and for a specified period of time.

Long-term disability provides payments when your short-term disability payments run out. These policies specify the percentage of income and amount of time that an employer will pay benefits. If Ms. Fell became disabled and had to use her long-term disability benefits, she would likely be required to participate in rehabilitation programs that her employer recommends.

Ms. Fell's employer could pay the full cost for her disability insurance or Ms. Fell might pay some or all of the premiums. If Ms. Fell's employer pays the premium, then any payments that Ms. Fell receives from the policy would be taxable. However, if she pays the premium with after-tax dollars, then she does not have to pay tax again on the payments that she receives from the policy.

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