Group disability insurance plans often present a false sense of security and leave blind spots in clients’ financial strategies if they are not supplemented with individual insurance policies.
Most clients — and some advisors — are unaware of the pitfalls and hidden barriers within their employer-offered plans. Here are some of the common hurdles and limitations of group coverage plans. Determine how your clients’ plans impact their financial goals and identify opportunities to leverage an individual policy to offset and safeguard clients’ income in the event of full or partial disability.
Determine Clients’ Benefit Under Group Plans
Individual policies holistically consider all compensation sources to define insurable income. But most group policies only include monthly salary when calculating the payable benefit amount. Under this definition, non-salary income sources such as bonuses, revenue distributions and performance-based awards are not included. Payments can also be further reduced by taxes if the employer pays premiums on the employee’s behalf.
Additionally, consider the maximum monthly benefit outlined in the plan. Most group disability insurance plans will pay employees a percentage of their income up to a maximum amount. If the maximum monthly benefit isn’t set high enough, your clients may not maintain an amount of coverage that will meet their monthly needs. This can be an issue for highly compensated professionals such as doctors, attorneys, investment bankers and those in the technology industry, whose total income often includes non-salary sources and exceeds maximum monthly benefits.
Portability is an important concern for employees with a high tendency for relocation such as doctors, bankers and lawyers, or for those who may not pass medical underwriting for a new policy. Group disability insurance policies typically are not portable and will not follow employees when they leave an employer.
If clients are able to extend their coverage upon departure, they are met with a number of prohibitive restrictions and diluted terms of coverage including immediate and frequent rate increases, limited monthly benefits and provisions that offset coverage based on future employer benefits.
They will also typically lose protection to work in their chosen field or perform their own specialty and will only be covered in the event of a total loss of income.
Elimination Periods And Special Conditions Limitations
The elimination period, or how long employees under a group policy need to wait before benefits kick in, can sometimes be a barrier to receiving coverage no matter how favorable the policy’s terms are. Most employer plans require 90-180 days of consecutive and continuous total disability before payments are made. Several common disabilities, such as knee injuries and heart attacks, have a shorter average recuperation time and allow employees to return to work before the waiting period ends, preventing a benefit payment.
Group policies may limit coverage for certain special conditions or self-reported disabilities including chronic fatigue syndrome, musculoskeletal issues and environmental allergies like latex sensitivity in doctors, among others. Claims related to a current or pre-existing condition are likely to be limited to a short time frame of coverage or not covered at all.
Partial And Proportionate Losses
Another stark difference between individual and group disability insurance policies is the coverage for partial and proportionate loss of income following a disability. In a group policy, residual benefit payments are not usually guaranteed to be a proportionate benefit. Policies will either include a proportional or direct offset benefit that will lessen the policy payout.
In the event of a reduced, partial loss of income, instead of a complete loss, the amount an employee is still able to earn will be deducted from the total amount of the monthly benefit. The remaining difference is paid by the policy. For example, if a client earning $240,000 per year ($20,000 per month) is covered by a group plan with a maximum monthly benefit of $10,000 and suffers a 50 percent loss of income, a direct offset definition will eliminate the opportunity to receive any benefit amount. This situation is common for high earners or in instances of low maximum monthly benefits.
Many clients assume their group policies meet all their coverage needs, when in reality their group policies open their long-term financial safety to risk. Discuss multi-source income coverage, special conditions limitations, coverage waiting periods and coverage caps with your clients to ensure their needs are fully met. Individual policies are a necessary complement to group disability policies as they offer a solution to these issues and extend beyond group policy limitations.