Many people assume they do not need individual long-term disability insurance because they are covered through their employer. However, just because they may already have group disability coverage does not mean they will be covered adequately especially if they are high-income earners.

Group disability insurance has limitations that may not be completely understood, and individuals could suffer unexpected and severe financial hardship if they do not supplement their employer-provided coverage with an individually owned long-term disability policy. Moreover, it is even more important that those not covered by an employer-sponsored group plan carefully investigate an individual insurance plan.

Group long-term disability insurance is provided by and owned by the plan sponsor, typically an employer. If an employee becomes unable to perform the duties of their job due to a disability caused by an accident or illness, the policy replaces a portion of income while they recover. There is no individual underwriting, most (if not the entire premium) is employer-paid, and pre-existing medical conditions are typically covered.

However, group long-term disability insurance is not portable if a person leaves their job, and it can potentially be cancelled or changed by the employer. Most importantly, the coverage is typically limited to a specific percentage of an employee’s base compensation, often 60%, up to a maximum monthly amount, typically between $10,000 to $25,000.

This creates three potential problems:

• Unless the employee is regularly saving 40% of their income, they may find the reduced income a hardship.
• High-income earners may encounter the monthly maximum benefit amount before the 60% level is reached.
• Only base compensation is typically considered eligible compensation for group disability insurance. Employees who regularly receive bonuses or commissions stand to have their take-home pay reduced drastically in the event of a long-term disability.

Benefits of individual disability insurance

Individual disability insurance can drastically lessen the financial blow described above, since it typically is used to supplement, not replace, group coverage. It is paid by the client with after-tax dollars, so once in place, the benefit payments will not be subject to change or taxed.

Not only is it portable, but it can be tailored to the specific client’s needs in terms of what occupation it covers, the benefit amount, and the waiting period before benefit payments begin.

The policy is medically underwritten, so as with individual long-term care insurance, waiting until a disability begins will disqualify a client from obtaining coverage. The annual price for individual long-term disability coverage is generally 1%-3% of one's total salary.^** Clients may be tempted to choose the policy with the lowest cost, however important differences exist between various policies. In addition to the potential monthly benefit amount and other factors listed above, the definition of disability is crucial.

Some policies will pay benefits only if the insured is unable to work at any occupation whatsoever. More comprehensive (and typically more expensive) policies will pay benefits when the insured is unable to work at the occupation for which they are trained and experienced.

For help in understanding your existing long-term disability coverage, determining the need to supplement that coverage with an individual policy, and choosing the insurance carrier and coverage that best meets your situation, consult with your Financial Advisor. Your most valuable asset typically isn’t your home or retirement account; it is your ability to earn a living for the rest of your working years. Protecting that asset and thus your dependents and their future is critical.