Most American workers who are protected by long-term disability insurance (LTD) are enrolled in employer-sponsored group plans. However, individuals who are self-employed or whose employers do not offer LTD as a benefit may still wish to purchase a long-term disability insurance policy directly from an insurance company. Workers who do not have access to employer-sponsored LTD may still want to see group vs. individual LTD policies compared. Understanding LTD policy types and how they are used may be especially important if you are preparing to change employers or leave an employer with group plan benefits to start your own business. A comparison between group vs. individual long-term disability policies may also help workers on group plans explore their options for purchasing additional coverage.
What Is the Difference Between Group and Individual Disability Insurance?
The core difference between group vs. individual long-term disability policies lies in how they are contracted with the insurance company. Group plans are the result of a bargain struck between a business or other organization, and the insurance company that provides the disability income replacement coverage. The “group” in these instances consists of the business’s employees or the members of the organization. Individual LTD policies are contracts directly between the insurance company and the person covered by the policy.
Another way of understanding LTD policy types is through the regulatory frameworks that govern them. Group plans through employers often fall under the purview of federal guidelines pertaining to employee benefits, and they may be subject to specific requirements for filing deadlines and appeal procedures as a result. Individual long-term disability policies tend to be regulated by state laws exclusively. This can mean that you may see somewhat different policy options for purchasing a policy individually, depending on where you live.
What Are the Disadvantages of Group Disability Insurance?
Although you should always check the terms of the specific policy, one of the major disadvantages of group vs. individual long-term disability policies for many people is that policies offered under group plans tend to cover a lower percentage of an individual’s pre-disability income. Another point to consider when you see group vs. individual LTD policies compared is that the benefits paid under employer-sponsored group plans are much more likely to be subject to income taxes than LTD benefit payments under personal insurance policies.
Group plans may also run into issues with portability, meaning that you may lose coverage if you need to change employers. Some plans and policies do offer options for converting a policy obtained under an employer-sponsored group plan to a personal insurance policy with the same company that offers comparable coverage, so you may wish to consult with an attorney regarding your options if this is a concern for you.
General Trends in Group vs. Individual Long-Term Disability Insurance Policies
One point you are likely to run into frequently if you are comparing group vs. individual long-term disability policies is that there are very few “absolute” differences that apply in all cases. Once you get past the initial fact of how the policy is obtained, much will depend on the terms of the specific policy. For the purpose of understanding LTD policy types, many people may find it more useful to see group vs. individual LTD policies compared in terms of broad industry trends and tendencies, than to try and establish a set of criteria that will apply to all individual policies and no group plans, or vice versa.
Understanding LTD Policy Types: Taxability of Benefits
The taxability of benefit payments can often be one of the easiest and clearest ways to see how industry norms, as much as legal and regulatory mandates, structure many of the differences between group vs. individual disability long-term disability policies. From a legal standpoint, there is nothing about whether a policy is part of a group plan vs. purchased individual that automatically affects how benefits will be taxed. Instead, benefits are taxed based on whether the policy premiums were paid with money that had already been taxed once vs. paid with pre-tax dollars.
Premiums Paid With Income Already Taxed
Individuals who purchase personal LTD policies directly from insurance companies will almost always be paying those premiums with money on which they have already paid income taxes. Because the premiums were paid with money that had already been subject to income tax, when benefits are paid out under those policies, those payments are not put through a second round of income tax.
Premiums Paid With Pre-Tax Funds
When employers set up long-term disability policies as part of the benefits they offer to employees, often the company’s human resources (HR) and accounting teams will schedule payments on each employee’s behalf, or arrange for pre-tax deductions to be taken from each employee’s regular paycheck to cover the cost of premiums. In some cases, the employer may do both, contributing a percentage of the premium and withholding the remainder from the employee’s check. In each of these cases, the benefit paid in response to a long-term disability claim is generally considered taxable, because the money paid for the policy in the form of premiums was never previously taxed.
Tax Implications for Long-Term Disability Benefit Payments
If your employer handles premium payments in some other way, the taxability of benefit payments may not apply to your situation. Similarly, if you are enrolled in a long-term disability policy as part of a group plan through a professional organization, rather than through an employer, you may want to review policy documents and your premium receipts with an accountant or disability lawyer to be sure of how your long-term disability benefits might be taxed in the future.
Group vs. Individual LTD Policies Compared: Portability
In the insurance industry, portability is the function that allows a policyholder to retain their coverage when they “leave” the set of conditions under which they enrolled in the policy. Many people are likely familiar with the Health Insurance Portability and Accountability Act (HIPAA), which establishes basic provisions for portability in health insurance coverage, particularly when the health insurance is held through employers. Another familiar federal law that covers employer-sponsored health insurance is the Consolidated Omnibus Budget Reconciliation Act (COBRA), which requires group health insurance plans through private-sector employers above a certain minimum of employees to allow individuals who lose their job-related benefits under certain qualifying circumstances to retain their health insurance for a limited time by assuming the full cost of their premiums, plus an administrative services surcharge.
Employee Expectations of Portability
Despite the often high costs associated with this maintenance, many individuals do choose to pay the costs to temporarily continue their health care coverage under COBRA, in part because doing so also helps to extend some of the HIPAA provisions that prohibit denial or exclusion of coverage for pre-existing conditions for policyholders who have maintained continuous health insurance coverage. Precisely because these federal laws are so familiar and the protections they provide are widely used, many people who have health insurance through their jobs may be used to thinking of them as applicable to all employer-sponsored insurance plans.
Portability in Group vs. Individual LTD Policies Compared
In fact, neither COBRA nor HIPAA offers these same protections for employer-sponsored group plans that cover only life insurance or only disability insurance. In the absence of federal mandates to the contrary, the reality is that changing employers will also usually mean losing your current LTD if you are on an employer-sponsored group plan. Group plans through professional organizations will likely be subject to continued membership in that association, although terms and dues can vary.
If you are comparing group vs. individual long-term disability policies and how they are used, one of the most striking differences may be the portability of individual LTD policies. A move across state lines may sometimes make your personal long-term disability insurance policy subject to a different set of regulations, thanks to differences in the state laws that govern the insurance industry. The policy itself, however, is a contract directly between the policyholder and the insurance company. Because that contract is not dependent on the policyholder’s relationship to any particular employer or professional association, that contract goes where you do.
Understanding LTD Policy Types: Own Occupation vs. Any Occupation
One of the most important trends in group vs. individual long-term disability policies may be the much higher prevalence of “own occupation” coverage among LTD policies purchased on an individual basis. Sometimes group plans through professional organizations may also offer own occupation coverage. This type of industry association group plan may be especially common in the medical field, where the relationship of individual physicians to the healthcare groups within which they work is often not quite that of an employee to an employer, and the any occupation coverage more commonly available on employer-sponsored group plans overall is often not sufficient to realistically offer meaningful peace of mind. Policies purchased individually may offer far greater freedom of choice in the scope of coverage, but usually at comparably higher prices.
Understanding LTD policy types in terms of own vs. any occupation coverage can be very helpful in recognizing what to look for when seeing group vs. individual LTD policies compared. All the same, always make a detailed examination of the terms of each specific policy you are considering.
Any Occupation LTD
Whether the policy is purchased individually vs. as part of a group plan, an “any occupation” long-term disability insurance policy is one that provides benefits only if the person covered under the policy is unable to work in any job. In this context it does not matter what the job is or whether it has any connection to the individual’s chosen career path. If the insured person is able to do work of any kind, he or she will not qualify for benefits under an any occupation long-term disability policy.
Own Occupation LTD
An “own occupation” long-term disability policy provides benefits when an individual is unable to continue working, or unable to resume working, in his or her own pre-disability job. How robust this coverage will be in practice often depends heavily on how the terms of the policy define “own” occupation. A policy that defines “own” occupation by the type of licensure or professional certification needed and counts an occupation as a policyholder’s own as long as it requires the same license or certificate may not be as favorable to the policyholder as a policy that applies a more tailored definition.
This is another area in which professional organizations sometimes attempt to help fill the gaps, with medicine again being a field in which there can often be substantial disparity in both income and job requirements depending on specialty. However, if employer-sponsored group plan insurance is an option for you and you want to see group vs. individual LTD policies compared in part because you are concerned about own occupation coverage, you may consider working with your company’s HR department to determine whether an individually-purchased policy “rider” for own occupation coverage could be coordinated with your employee benefits.
Group vs. Individual LTD Policies Compared: Evaluating Your Next Steps
Understanding LTD policy types in terms of whether they are purchased individually as opposed to falling under a group plan sets you up to appreciate some of the differences that are likely to make the greatest difference in your experience if you ever need benefits. Many of those differences are trends based on the most convenient ways for an organization vs. an individual to establish a contract with an insurance provider, so when you see group vs. individual LTD policies compared always keep in mind the importance of examining the specific terms of each policy before making a decision. Remember that, although employer-sponsored group plans do tend to offer more limited coverage and benefits compared to individually-purchased ones, many people comparing group vs. individual long-term disability policies eventually find a “middle ground” by purchasing individual policy supplements that expand or enhance the coverage and benefits offered through their employers’ group LTD. Do your research carefully and consider working with a disability lawyer as well as your company’s HR or benefits coordinator to ensure you find coverage that fits your priorities.
