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PRIVATE DISABILITY INSURANCE vs.

GROUP DISABILITY INSURANCE


Clients often ask, “Should I enroll in my Group Disability plan or purchase my own Private Disability
plan?" The pros and cons of both should be considered thoughtfully before deciding what is best for
you. There are three likely outcomes from this analysis: You will enroll in the group plan, you will buy an
individual plan, or you will enroll in your group plan and layer a small individual policy on top of the
group plan. Below is a summary of the difference, in general, between these types of policies.

COST
Many people assume that Group Disability Insurance provides adequate protection against disabilities.
The perspective is often that Private Disability Insurance policies are too expensive and that it is the
same as a Group Disability Insurance plan. The reality is that private policies cost more than group
policies but they also pay more money in benefits and in more claim scenarios than a group plan.

Here is another way of looking at it. Let’s say you were in the market for a new Toyota Camry and went
to two dealerships and found two identical cars. One was priced at $25,000 and the other at $2,500.
You would probably be skeptical of the one that was priced at $2,500. Now let’s say you are in the
market for a disability insurance policy. One costs you $3,000 per year and the other costs $300, why is
it that people are skeptical of the one that costs $3,000? The difference is that people are familiar with
what a Toyota Camry should cost, they are not familiar with what a quality disability insurance contract
should cost.

Group policies are much more profitable for the insurance companies yet they cost much less than a
private plan. They aren’t making the money on higher premiums so they must be making their profit on
limiting benefits.

Don’t let perception become reality, look past the cost, and asses the value of the policy you are
considering. A policy that pays you when you need it is a much better deal than one that costs a lot less
and is not there when you need it. Disability Insurance is designed to protect your income, and if the
only protection you have is Group Disability, your family is truly exposed to financial disaster should you
suffer an extended long term disability.

DISABILITY BENEFITS
There are plenty of horror stories out there relating to Group Disability Insurance and the claims
experience people have. Although some of these situations and stories are very sad, a major contributor
of these disappointments and the bad reputation is a lack in understanding of Group Disability Insurance
benefits. Depending on participation levels and who pays the premium, Group Disability Insurance
usually does not require any medical underwriting, which is one of the greatest benefits of having it.
Overall, most people assume Group Disability Insurance to be simple and sufficient, but there are many
things that should be understood.
Employers provide these benefits, often only keeping price in mind, and employees accept these
benefits without ever questioning their quality. Group Disability Insurance has the advantage of lower
price (at least initially) over Private Disability Insurance. For most employers the price is the beginning
and the end of the decision.

The fact of the matter is that Group Disability Insurance is not intended to be high quality income
protection. However, the cost is lower (you get what you pay for) and there is generally no medical
underwriting (red flag!), allowing employers to provide it at a low cost and those who are otherwise
uninsurable to have some level of protection.

Definition of Total Disability

The definition of disability, which describes the circumstances in which a person can qualify for a claim,
used in most Group Disability Insurance contracts is one detail that is often overlooked. Most group
contracts will provide an Own-Occupation definition of disability, which will pay benefits if a person is
unable to do his/ her primary occupation, but only for the first 24-months of a disability claim. After 24-
months, the definition will become an Any-Occupation definition, which only pays benefits if a person is
unable to perform ANY job for which he/ she is reasonably qualified. What this means is that after the
initial 24-month period of time has expired, in order to continue collecting benefits for the remainder of
the benefit period, the claimant must be unable to, for example, “flip hamburgers”.

This is a very important provision that must be considered and understood. The horror stories of a
person on a disability claim being told that they have to go work elsewhere, should no longer seem like
such a horror story – it is clearly stated in the contract.

Private Disability policies, if designed correctly, will have a definition of disability that is Own-Occupation
for the entire benefit period not just for 24-months.

Maximum Benefits Payable (how much of salary will be covered)

Group Long Term Disability insurance traditionally insures a maximum of 60% of a person’s base salary,
up to a specific monthly “cap” (i.e. $5,000, $10,000, etc.) Word of caution here: Be aware that a $5,000
cap can cause a “reverse discrimination” situation for most highly compensated employees, e.g. those
with incomes beyond $100,000. The reason we refer to this situation as reverse discrimination is
because when executives earn $200,000, for example, they will still only get $5,000 (not $10,000 and as
a result, they are only being covered for 30% of their wages). Not too good, in view of the fact that it’s
hard enough living on 100% of income (see Offsets!).

Bonus/ Commission: This form of income, as previously mentioned, is not usually covered by Group
Disability Insurance, and as a result, the insured (even those making less than $100,000) will not receive
their full 60% of coverage.
Offsets (reductions to the benefit amount)

Something that many people do not know about Group Disability Insurance is that benefits are offset
dollar-for-dollar with any benefits received from other programs or policies such as Social Security
Disability. Additionally, you are required to apply for Social Security Disability and provide proof of
application to the insurance company on a regular basis.

Standard offsets or reductions to the benefit amount payable from group plans are: (1) Workman’s
compensation; (2) Social Security disability benefits; (3) benefits received under a retirement plan which
has been triggered prior to the retirement date; and (4) other disability income policies.

Taxation of Benefits

If your employer pays for your Group Disability Insurance, your benefits will be taxable in the year you
receive them. If your group policy is paid for by you with pre-tax dollars via payroll deduction, the
benefits are also taxable.

Portability

As we become a more mobile workforce, the portability of benefits is important. Group Disability
Insurance usually terminates when your employment does. A Private Disability Insurance policy is yours
and goes with you wherever you work.

Guarantees (refers to rates and renewability)

Renewability: There are a couple of different contract types. Obviously, guaranteed renewable or
conditionally renewable, found in private plans, are the best, and without exception are noticeable
lacking in all group and association plans. This means coverage can be cancelled by the carrier.
Otherwise, they would be aggressively underwritten and this would be higher in cost.

Premium: Only private plans offer guaranteed rates and once again, if group/ association rates were
guaranteed, the cost would be much higher than their initially published rates. I say “initially published”
rates, because these rates can be increased by the carrier at any time and group rates certainly will be
increased as the average age of the group rises.

Additional Benefits Not Included in Group Disability Plans

Partial Disability: Group Disability policies cover only total disability while Private Disability policies offer
the ability to add a residual/ partial disability provision. This provision entitles you to a monthly benefit
equal to 50% of your maximum disability benefit if you should become partially disabled and suffer a
20% loss of income or greater.

Inflation Protection: This rider is essentially a cost of living adjustment. If this rider is included in a
Private Disability plan the benefits will be adjusted for inflation by linking the policy to the relevant
consumer price index.
Future Increase Option: A provision commonly included in a Private Disability Insurance policy, this
option permits you to buy extra coverage up to a certain age without the need of further medical
consideration.

THE CLAIMS PROCESS


Group Disability (ERISA)

If you have a Group Disability Insurance policy, most often purchased through an employer, you may
think you would have the same claims process as a privately purchased disability policy – but, you would
be flat out wrong.

In most cases, your company’s Group Insurance policy was set up by use of the Federal statute
Employee Retirement Income and Security Act if 1974 (ERISA). If your company Group Disability policy
was set up using this statute, your rights to contest any denial by the plan administrator or insurance
company is severely limited.

First off, in most states you would have to deal with the ERISA “discretionary clause” which puts a
policyholder behind the 8-ball before a claim is even filed. This clause allows the insurance company,
which will pay the claim, to initially determine if the claim is covered by the disability policy. If the
insurer says “no”, then the claimant has to climb out of a deep legal hole to prevail no matter what the
actual facts of the claim may be.

While private policy claims disputes are resolved by jury trial including rights to discovery as well as the
possibility of punitive damages, ERISA policy claims are not and although you do have the right to
contest your denial in a Federal Court, in most cases, the Federal Court Judge will only review the
administrative record. The administrative record is the claim file and all of the submissions that are
made to the plan administrator or insurance company before the claim was denied.

As previously mentioned, Private Disability Insurance policies allow for full discovery and punitive
damages while ERISA coverage permits very limited discovery and no punitive damages. This means
that if the Group Disability company loses the case they would only be forced to pay the benefits you
should have been paid. As you can image they would often rather deny the claim and take their chances
in a court proceeding with the odds stacked in their favor and the burden of proof on your shoulders.
After all, the worst case scenario is that they would have to pay your benefits with no risk of punitive
damages.

You must understand that the administrative record, the submissions made to the administrator or
insurance company before the denial, is all the judge will look at. The standard that the judge will use is
whether a denial that was issued by the plan administrator was based upon what is called “substantial
evidence.” Substantial evidence has been defined by the court as “more than a scintilla and less than a
preponderance.” The definition of preponderance means that it is “more likely than not.” Taken
literally, the “deck is stacked against you” in terms of a review by the Federal Court if you are denied
your claim by a Group Disability plan formed under the ERISA statute.
In reviewing an ERISA plan denial, the Federal Court will also treat your doctor’s medical reports the
same as the physician who is by the insurance company to assess your condition.

Private Disability Insurance

Private Disability plans have significant benefits over ERISA plans. When you purchase a disability
insurance policy from and insurance broker you enter into a contract with the insurance company. If the
insurance company denies your claim for benefits, your claim is governed by contract law and the case
may be brought in the state were you reside. You will have the right (in most cases) to have the case
resolved by a jury of your peers and will have the right to bring witnesses to court which could include
medical witnesses to support your claim against the insurance company. Significantly, your time to
appeal any determination is governed by the statute of limitations. This gives you much more time to
seek the services of an attorney as compared to an ERISA plan disability claim.

In most cases the issue to be determined is whether you meet the definition of disability defined by your
policy. It is extremely important to know that the definition that is in the insurance policy is not likely to
be taken literally by the court. The courts in many states have interpreted these clauses more liberally
than their meaning. This means that although you have been denied by your insurance company based
upon a policy definition, their denial may not have been proper.

Conclusion

The truth is Private Disability Insurance policies give you control over your individual circumstances and
Group Disability Insurance policies are much less reliable. Private Disability Insurance, though more
expensive, does not have any of the severe drawbacks – you pay the premiums, get the coverage and
receive tax-free benefits if you become disabled. The insurance will not avert disability, but it can
restore your peace of mind and provide a crucial safety net should you become disabled and unable to
earn an income.

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