Do I Need More Than My Group Disability Insurance?

Group disability insurance is generally very affordable, with many employers offering it as part of a benefits package and paying most of the premiums.

However, group disability insurance policies tend to have lower benefit amounts, so you may want to consider buying an individual disability insurance plan as well.

In this post, we will compare group and individual disability insurance to find the right policy for you.

How does group disability insurance work?

Many employers offer disability insurance as a part of an employee benefits package. Group disability insurance provides coverage to a group of people. It pays you a monthly benefit if you cannot work due to injury or illness resulting in disability.

Because many people buy into it, a group disability plan is much cheaper than individual disability insurance. However, the downside is that these policies usually offer less coverage.

How much disability insurance do I need?

Before we answer this question, let’s take up another equally important one: Why do you need disability insurance?

Most of us, do our best to protect our assets, like our car and home. But your greatest asset is your ability to earn a living.

Disability life insurance protects this asset. It replaces a portion of monthly income if you lose the ability to work due to injury or illness resulting in disability.

So how much disability coverage do you need?

There is no one-size-fits-all answer, as everyone’s needs are different. Having said that, financial experts believe that 60% to 70% is a sufficient amount for income replacement, because most people spend less when they cannot work.

What is individual disability insurance?

Individual disability insurance covers one person. In exchange for premium payments, the insurer promises to replace a portion of your salary if you cannot work on account of a disability.

Disability insurance policies are of two types:

• Long-term disability insurance

Long-term disability insurance provides a steady stream of income during a prolonged illness or after a disabling accident. You can buy long-term disability insurance in Canada yourself or through your employer.

• Short-term disability insurance

A short-term disability insurance policy can keep you stay afloat if you have to take time off work for a few weeks or months due to sickness or injury.

Most short-term policies provide coverage for a few months. Some, however, may pay out a benefit for up to two years. Many employers offer short-term disability insurance as a company-paid benefit. You can also buy it separately.

Definition of disability insurance

There are two common disability definitions — own occupation and any occupation.

Own occupation disability insurance

Own-occupation disability insurance protects your ability to work in your current profession. This kind of policy pays benefits even if you can earn money doing something other than the job you had at the time of disability.

In other words, you are eligible for benefits even if you take up or can do another job in a similar field. For example, let’s say you are a surgeon and cannot practice in your preferred area because of a disability. However, your disability is not so severe as to prevent you from performing the tasks required in some other occupation suitable for your education and experience. In this case, you will still be eligible for benefits if you have own-occupation disability insurance.

Own-occupation disability insurance defines disability more leniently than other types of disability policies. As a result, it is also usually the most expensive.

Any-Occupation Disability Insurance

Under any occupation, you will not receive benefits if you are considered fit to work in any other job suitable for your qualifications. It does not matter if you do not want to take up another job. Nor does it matter if that job pays only a fraction of what you earned before. If the insurer decides you are fit enough to work elsewhere, you will not get a payout.

In other words, you are considered applicable for payout only if you cannot perform the duties of any job. Any-occupation is the stringiest provision under definitions of disability. Although you pay lower premiums, you may find yourself in a tight spot if you were to encounter illness or injury resulting in disability and find you are not eligible for the benefits.

What are the pros of a group disability insurance policy?

Here are some of the key benefits of group disability insurance.

1. Everyone in the group gets coverage

This is the biggest advantage of group disability insurance. You do not need to undergo a health screening to qualify. Everyone in the group qualifies automatically because they are a part of that group. This can be beneficial if you have a health condition that would make private insurance expensive or impossible for you.

2. It is cheap (even free)

Generally, employers pay for most or all of the premiums. Even when you have to bear the entire cost, group disability insurance turns out way cheaper than private insurance. For this reason, always sign up for group disability insurance if it is offered.

3. It is easy

Another advantage of group life insurance is that it is easy to sign up, requiring less paperwork and little or no effort from you.

What are the cons of a group disability insurance policy?

Beneficial as group disability insurance is, it has some key limitations.

1. The payout amounts are lower

When it comes to group disability insurance, you do not get to pick the benefit amount. Instead, your employer sets it. Research shows that group disability insurance policies tend to have lower payouts. So, while the policy may help replace a part of your income in the event of a disability, the payout may not be sufficient for you to live comfortably.

This brings us to an important question — how much does long-term disability pay?

Generally speaking, disability insurance replaces 40-80% of your income. However, anything less than 60% could not be enough to cover your expenses.

2. A group disability plan may not cover all of your income

Group policies usually cover only the base salary which means any bonuses and commissions you get will not be covered. This could be a problem if you earn hefty bonuses and commissions. Even with 60% income replacement, the monthly benefit may prove grossly inadequate.

3. The benefit may get taxed as income

If your employer covers the premium, any benefit you collect will get taxed as income. So, if your policy covers 60% of your annual salary, you will actually receive something like 40-45%. By contrast, payments from an individual disability policy are tax-free.

4. Group disability insurance tends to be more restrictive

Group disability insurance often has more restrictions about how you can access the coverage. These plans tend to offer any occupation coverage or own occupation coverage for a limited period — usually 24 months. After that, your coverage will become an occupation.

Here is an example that shows how group disability plans can be restrictive:

A neurosurgeon on a group disability plan, who sustains a serious injury in their dominant hand and can no longer perform surgery, however can work in another job suitable for their education and skills, like an administrative role or a teaching job will have one of two outcomes:

If their disability plan is any occupation, they will not receive benefits. That is because they are not so injured that they cannot perform the tasks required in any occupation suitable for them.

If their policy comes with a limited-own occupation period, they will receive benefits for only two years. After a couple of years of being on a claim, their policy will become any occupation, and consequently, their monthly payments will stop.

5. You cannot take the coverage with you

Group disability coverage is tied to your job. If you leave or lose it, you may not be able to take the coverage with you.

And we are sorry to be the ones to break the news, but not every employer in Canada offers group disability insurance or a group benefits plan. If that is true for your new employer, you could find yourself in a difficult situation, especially if your health has gone down considerably since you took the policy. An individual disability life plan may now cost you more. Worse, if your condition is severe, it may not be available to you altogether.

6. Your employer can cancel the policy

Your employer — not you — owns the policy. If they decide to cancel the policy for whatever reason, they can. You will have to find a new policy.

7. You cannot add riders

Since you do not own the policy, you cannot tweak it to suit your needs. And that means you cannot add riders — extra features designed to enhance your disability income coverage for a small fee.

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Do I need more than my group disability insurance?

Everybody’s situation is different, so there is not one single, objective answer. As said before, group disability insurance usually has lower benefit amounts and more restrictions on how you can access the benefit.

To decide if you need additional coverage, you must:

• read the terms of the policy carefully to understand how it defines disability
• figure out how much disability coverage you need

If you think that your group policy is too restrictive or inflexible, and you don't have a Health Spending Account (HSA) consider buying an individual policy. The same holds true if the group policy does not provide as much disability benefit as you would need.

Conclusion

Disability insurance makes sense for everybody who relies on a paycheck. It provides you with an income if you were to sustain an injury or illness resulting in disability. Many employers offer group disability insurance to their workers, and if this option is available to you, take it up without doubt.

However, you should not rely solely on group disability insurance through work since it usually offers less coverage. Instead, consider buying an individual disability plan also. Dundas Life works with leading insurers in Canada and can help you find the right disability insurance policy for your needs at the best price