For a disability insurance quote, please call Bryan Cranson, owner of Cranson Insurance at (248) 581-0331
By Thomas L Lloyd
The typical conversation when discussing cost for disability insurance with a client usually revolves around their own experience with either a current or previous employer sponsored or voluntary group disability insurance plans. “Why does an individual plan cost so much more than what I pay (or paid) for my work plan”? Well, simply put, you are comparing two plans that are completely different from one another in terms of how they pay you a claim and your holding rights. Each plan brings a variety of differences that may appeal differently to each person but you must understand some of these key variations in order to properly assess which plan may provide the most protection for your income. Consequently, I have outlines 5 areas that group and individual disability insurance plans differ.
1) Definition of Disability Provision – how does the plan deem you totally disabled? How does it pay you a benefit?
A reputable individual disability insurance contract will generally provide a definition of disability called true own occupation. This means you will be protected in the event any illness or injury prevents you from working in your own occupation. Moreover, if you choose to earn income in another occupation, your disability insurance plan will continue to pay you as long as you do not return to your original occupational duties.
Group disability insurance plans vary but more often than not, they will offer a modified own occupation definition of disability. This provides protection in the event any illness or injury prevents you from working in your own occupation. Unlike the individual plan noted above though, you cannot be gainfully employed while receiving benefits. In other words, if you earn any additional earned income working in any capacity while on claim, your disability benefit will no longer be paid to you.
Advantage – Individual Plan.
2) Medical and Financial Approval – how can I qualify for my plan?
To obtain an individual contract, you must complete an application from the insurance company asking questions about your occupation, medical history, and recent financial information. A paramedical examination is usually ordered for and paid by the insurance company to have an examiner visit you to complete a blood sample and urinalysis. Questions are also asked about your medical history as well as any recent or current prescription medication use. Your medical records from your physician(s) are usually ordered by the insurance company underwriter to review. The approval process from start to finish usually takes about 4-6 weeks. Any pre-existing health conditions are excluded from coverage.
Group plans are generally guaranteed standard issue for all participants. This means that there is no individual underwriting for each person – everyone receives the same plan regardless of their current health status. The enrollment period usually occurs once a year and participants usually have to accrue a certain number of full-time hours to qualify for the plan. Always check with the benefits manager in Human Resources to seek out this specific information. Participants will have no health exclusions for their coverage.
Advantage – Group Plan
3) Portability and Renewability Provisions – What can change with my plan? Who can change it?
Individual disability insurance plans should always be selected with two imperative contract provisions – Non-Cancelable & Guaranteed Renewable – this does not mean you as the policyholder cannot cancel the policy, it means the insurance company cannot alter the terms of the contract or the price. This is important since cost always increases with age and this market is volatile with many plans changing options and terms every few years. Additionally, you own the contract personally so it will travel with you regardless of where you work or if you change occupations. Getting individual coverage at a younger age is always a wise financial decision since you can lock in your premium at a low rate and feel confident you will be protected for the rest of your career – regardless of where it takes you.
Group plans are conditionally renewable and subject to premium change at anytime by either the employer or insurance carrier. Terms of the contract can be changed at anytime without participant input as well as canceled. If the participant leaves that employer their coverage does not go with them (is not portable). This road always leads to that person calling to get an individual plan at the age of 45-55 and the premium rates are very high.
Advantage – Individual Plan
4) Benefits and your taxes – will my disability benefit be taxed or not?
A strong advantage of an individual disability insurance plan is the taxable nature of its benefits. As long as the premiums are paid by the policyholder and not deducted as a business expense – all benefits received for a claim will be tax-free. This can have a significant effect on lifestyle protection and limit any unnecessary tax exposure while on claim.
Group plans are treated as tax deductions by the company or are offered to participants as a pre-tax withdrawal from their paycheck. Since the taxes have not been paid – they get picked up when participants file a claim. A typical employee will receive 60% of their salary for a disability claim. That’s not their net pay though once their benefits are taxed at their federal and state tax ordinary income rates. In some cases with highly compensated executives who are in a high tax bracket, this can have a significant effect on their take home benefit
Advantage – Individual Plan
5) Coverage Options and Plan Design – Each person is different – should they control their plan structure?
All individual disability insurance plans provide the client complete flexibility and choice when determining what they want in coverage amounts. Some older people may not want to be fully insured due to cost or because they have other assets to use while younger people may want full coverage along with optional riders to fight against the eroding factors of inflation or purchase more coverage without more medical underwriting in the future.
Group plans do not allow the client the ability to adjust coverage amounts or add on any additional riders. This lack of flexibility may create problems for differences in protection between high level company executives, especially since most group ltd plans have a monthly benefit cap. For example, the plan may offer 60% coverage but have a total plan cap of $8,000.00 a month. That is not a problem for someone making under $100,000.00 a year but does present an issue for someone earning $300,000.00 a year.
Advantage – Individual Plan
These differences are what create such a wide chasm in price. Understanding them and deciding how that effects your own financial plan should be the focus as well as cost consideration. Each person’s long term financial goals are different but everyone needs to properly protect their own ability to earn an income.
Thomas Lloyd is a disability insurance specialist with the Financial Balance Group in Washington DC. He designs executive benefit plans for Physicians and Small Business Owners. 1-888-513-2300.
His website provides information and free individual disability insurance proposals for Physicians and Dentists
http://www.diquotes.com
