In a world where medical uncertainties abound, having a safety net for unexpected medical events is crucial. Disability insurance provides that financial safety net, ensuring that individuals who are unable to work due to illness or injury can still support themselves and their families. One common avenue for obtaining disability insurance is through group disability insurance plans, which are often offered by employers.

If you are considering purchasing disability insurance, one issue you may be facing is whether to enroll in a group plan offered by your employer or to procure an individual policy independent of your employment. Whatever decision you make, there are both advantages and disadvantages of enrolling in a group policy and purchasing an individual policy. Therefore, your decision should be based on how these advantages and disadvantages are suited to your situation.

If you work for an employer who sponsors a group benefit plan, that plan is most likely governed by the Employment Retirement Income Security Act of 1974, or ERISA, a federal statute that provides a set of rules and regulations concerning everything from issuing the policy to making benefits determinations. Below we discuss some of the advantages and disadvantages of enrolling in a group disability plan.

Advantages of Group Disability Insurance

Ease of Qualification: Unlike individual disability insurance, group plans typically have less stringent underwriting requirements. This means that individuals with pre-existing health conditions or a history of illness may find it easier to qualify for coverage through a group plan. For employees with health concerns, this accessibility can be a lifeline in obtaining crucial coverage. And, enrolling in a group plan is a streamlined process for you to acquire coverage. Typically, the plan has been established for some time and your employer handles the administrative aspects of enrollment, so your role boils down to simply deciding the level of coverage you want. For an individual policy, your role in the administrative process of obtaining coverage will likely be much more involved. Thus, these plans allow you to get coverage more quickly and easily than individual policies.

Less Expensive: Enrolling in a group policy is generally less expensive as compared with individual policies. Group plans necessarily involve a minimum number of members, which allows the insurance company to provide the coverage for a lower cost to each member of the group. Additionally, many employers contribute some or all of the premiums for group coverage. Therefore, you may be able to get coverage without paying anything more out of your pocket, whereas you may need to pay the premiums for an individual policy on your own.

Governed by ERISA: Your policy will likely be governed by ERISA, which may have some advantages for you. Because ERISA is a federal statute, this means that should you have occasion to bring a lawsuit against your employer, insurance company, or other plan fiduciary, you can do so in a federal district court rather than in the state court system. The federal court system often moves more efficiently than its state court counterparts and federal judges know ERISA well and are adept at interpreting it. Also, a stated purpose of the ERISA statute is to protect those who are insured by a disability policy, and therefore many ERISA regulations may be more favorable to you as an insured than the state laws.  Moreover, while some favorable state laws are not applicable in ERISA, federal law under ERISA makes it much easier for you to collect attorneys’ fees if you have some success in your lawsuit.

Disadvantages of Group Disability Insurance

Disadvantage Policy Provisions: As compared to individual coverage, group plans may have less favorable standards for receiving disability benefits. A group plan’s definition of what constitutes a disability may be more vague or restrictive than that in an individual policy. Specifically, a group plan will typically consider you disabled if you are unable to perform the requirements of your “own occupation” for the first two years of receiving benefits, but after two years, will consider you disabled only if you are unable to perform the requirements of “any occupation.” This change can result in you receiving benefits for two years because they conclude that you are able to perform “any occupation” for which you are qualified by education, training and experience. Most individual disability insurance policies do not have these provisions.

Caps on Certain Types of Benefits: Benefits will likely be capped with some types of disabilities. It is typical in group disability plans to have maximum benefits payable for a short period of time regarding mental-nervous medical conditions, often two years. Individual policies do not typically have such limitations.

Offsets that Reduce Benefits Payable: Group policies almost always contain certain offsets, called deductible income, that will reduce your benefits paid under the disability policy. For example, if your disability insurance provides for a monthly benefit of $5,000, and you also qualify for monthly disability benefits from another source, like state disability benefits or Social Security Disability Income (SSDI) benefits, of $2,000, the group plan will reduce your benefits by that amount and will pay you $3,000, so that the total monthly benefit you receive from all sources is $5,000. This can be further complicated if your group plan insurance company pays you benefits for some time, then you later get a favorable decision as to state or SSDI benefits, as your group plan insurer will expect you to then pay it any applicable offset because it “overpaid” you.

Less Control: You will have less control over your policy with a group plan compared with individual coverage. Group plans often do not offer any portability, so if your employment ends, so does your coverage. Also, your employer and the insurance company have the power to alter or even terminate a group plan without your input. And your group plan almost certainly provides broad, umbrella-type coverage that will apply to the entire group, and you will not have the option of customizing the coverage to suit your circumstances. Obtaining individual coverage gives you more control over these factors.

Tax Implications: While the premiums for group disability insurance plans are often paid with pre-tax dollars, the benefits received in case of disability are usually taxed as income. This can result in a lower net benefit for the insured individual compared to benefits from individual disability insurance policies, which are often tax-free. Understanding the tax implications is essential for accurate financial planning.

Limited Choice of Providers: Group disability insurance plans typically limit participants to a specific list of insurance providers chosen by your employer. This limitation means that individuals may not have the opportunity to shop around for the best coverage or to select a provider that aligns with their preferences. Limited provider choices can impact the quality of service and flexibility in managing claims.

Whether you decide to enroll in a group plan or obtain individual disability insurance coverage, obtaining disability insurance will likely present you with considerations and issues that you will have to weigh in making the decision. And, once you have disability insurance, if your disability claim is denied, call on the disability insurance experts at McKennon Law Group PC to get the help you need.