31 May 2016

Why Group Long-Term Disability Insurance Is Not Enough

If you were asked whether you had insurance coverage for a disability, you might respond that you have some coverage through your employer’s benefits package.  It’s a common response — but do you know any of the coverage details?  Many aren’t able to accurately summarize the basics of this coverage.


A typical group long-term disability plan will summarize benefits like this…

In the event of a disability that keeps you from working (and after a 90-day waiting period), you will be paid a disability benefit equal to 60% of your pre-disability base earnings, up to a maximum of a $5,000/mo benefit.


Okay, sounds pretty good so far.  But likely the only thing most people will remember about their group disability plan is — that they have 60% coverage for a disability.  Do they really have 60% coverage, though?  Not even close.  In this example, they potentially have much less than 60% coverage.  Here’s why:

  • This example plan says it covers “base earnings”.  It is very common to see this kind of setup — But what if some of your compensation is based on a bonus?  That bonus compensation would not be covered by the plan.  And depending on how much of your compensation is bonus-based, this could dramatically reduce what level of income is truly covered.
  • Who pays the premium for this group disability coverage?  This determines whether the benefits are tax-free or taxable to you.  If you pay the premiums out of your “after-tax” earnings, the disability benefits received when on claim will be tax-free.  If your employer pays the premium for you, the disability benefits will be taxable.  This is how 60% coverage all of a sudden is 35-45%, based on your income level and tax bracket.
  • Each of the above points already reduce your net take-home pay when on disability claim, but just imagine if both of them were combined!  If you have bonus compensation AND the plan premium is employer-paid, your net coverage in the end could dip below 30%.

…likely the only thing most people will remember about their group disability plan is — that they have 60% coverage for a disability.  Do they really have 60% coverage, though?  Not even close.

Would you like to live on 60% of what you used to earn?  Accepting 60% coverage from the get-go is already a big sacrifice.  But once you dig a little deeper and look at your true net take-home pay after taxes, the true coverage gets even worse.  Below is a visual representation of this — where you net 43% of your income after taxes.




We believe a group disability plan is a starting point.  It’s basically half the coverage you need.  Additionally, some of the contractual language in the group plan can be less valuable than what is provided in an individually-owned disability policy.  For example, the group plan may only cover you based on not being able to perform the duties of “your occupation” for a 2-year period, and then it’s “any occupation” after that.  This allows the insurance company to decide whether they feel you can work in another occupation or position, based on your education and experience.  You can avoid this completely with your own disability policy.


Owning a separate disability insurance policy (in addition to your group coverage) can be a great way to enhanced your net take-home pay during a disability — providing a net after-tax income replacement of 80% or even higher!


Our recommendation would be to look very carefully at your existing group disability benefits provided by your employer.  Even in the best case scenario, you still might not be comfortable with the level of coverage provided.



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