If you have group disability insurance through your employer, there will be times when coverage is inadequate. Employers often limit the coverage to control the cost. While many people depend entirely on their employers for disability benefits, they may find that when it comes time to claim, their group disability insurance does not provide sufficient benefits.
There are many reasons why group coverage may be insufficient:
- The benefit amount may be too small and have a low maximum which caps the payments
- Benefits may end after two years, leaving you without coverage in case of a long term disability
- Bonuses and commission may not be used to calculate your income, lowering the benefit amount
These are just a few reasons why group coverage is insufficient and should be supplemented with an individual policy.
To show you how group disability insurance can be supplemented with an individual disability policy, let’s take an example of Sara, a 40 year old female executive with an annual income of $120,000 including bonus and $3,000/month of taxable group disability benefit. Based on her income, she is eligible for a maximum of $5,780/month of non-taxable individual disability insurance. Here are 3 ways she can supplement her group disability insurance with an individual policy.
The simplest to understand and easiest to implement is the top up, which relies on the existing group coverage and adds enough coverage to obtain the maximum benefit.
Sara’s group coverage is paid by her employer, meaning that the benefit of $3,000/month will be treated as taxable income. To see how much additional coverage she is eligible for, we have to convert the taxable amount to an equivalent non-taxable amount, which in this case is roughly $2,100/month. The difference between the maximum and current benefit is the amount of individual insurance she can buy, which is $5,780 – $2,100 = $3,680/month. Monthly premium for benefits of $3,680/month start at $120.65 (1).
The drawback of the top up plan is that she can be underinsured if the group benefit doesn’t pay, such as with a strict definition of disability. Underinsurance can also occur if she leaves her employer and loses group coverage. To prevent underinsurance in the second case, she can add a rider to the individual disability policy to increase coverage after leaving her employer without proof of medical insurability. She will have to consider the next option to avoid underinsurance in the first case.
An offset means buying more individual disability insurance than a top up would provide. This typically happens when you are worried about the quality of group coverage and whether it will pay at the time of claim because of restrictive definitions of disability (it has an any occupation definition instead of regular occupation).
The individual plan can have a regular occupation definition of disability, and riders can be added to customize the plan to suit your need. If the group plan does pay, the amount received from the individual policy will be reduced. Because of this offset, insurance companies usually offer a discount of 10%.
In Sara’s case, she can buy the maximum amount of $5,780/month based on her income. Her monthly premium will be $167.09, including the 10% offset discount.
The main drawback of the offset plan is that the cost is much higher than the top up. But it gives assurance that even should the group coverage not pay, you’re still covered by the individual policy. Also, the insurance company must be notified if the group coverage ends, since the discount will also be canceled. If the insurance company is not notified and a claim arises, benefits will be reduced by 10%.
A wrap-around involves coordinating with the existing group coverage with two individual policies. One policy is used to top up while the other begins payments after group benefits end.
For example, if Sara’s group disability insurance provides benefits for two years, she can purchase an individual top up plan similar to the one mentioned in the previous section. It provides benefits of $3,680/month for premiums of $120.65/month. At the same time, she can purchase the wrap-around policy for $60.69/month. The wrap-around policy has an elimination period of 730 days (two years) and a benefit of $2,100/month, which equates to the maximum of $5,780/month that she qualifies for after adding the top up.
The plan that Sara chooses depends on a few different factors, such as the likelihood of leaving her employer, and the strength of her current group disability coverage. She may want to use a top up if the coverage is strong. On the other hand, an offset would be more suitable if the definition of disability is stringent or she wants to change employers. If the group coverage only lasts for two years, then the wrap-around plan may be most suitable for her.
1. Quote from Manulife. Rates are current as of March, 2015. Assumes non-smoker, Venture Series, occupation class 4S, benefit and regular occupation period to age 65, 120 day elimination period (730 days for wrap-around plan).
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