The answer to this question is “BOTH or NEITHER”. So what do I mean by this? Each has their own set of pros and cons. This article is designed to explain the differences, expose the “gotcha’s” and share how to maximize each. At Innovative Financial Group – Atlanta, we are a full service independent financial services organization that helps each of our clients explore, explain and make informed decision such as this.
So let’s jump into the differences of each.
Group Disability is a benefit that is offered by your employer. Here is how most group plans work
- Once employee qualifies for benefit – they are enrolled in plan
- No underwriting physically or financially, meaning everyone gets the coverage
- The coverage is generally not portable, meaning if you leave employment, you lose the coverage
- Benefits usually cover about 60% of w-2 salary and benefits could be taxable to individual
- If you become disabled and need the coverage, the monthly payments are based on current w-2 salary and length of coverage is limited after the first 2 years if you make income else where
Individual Disability is a benefit for the person covered by the plan. Highlights of this include
- Coverage is fully underwriting both physically and financially
- Coverage is personally owned and stays with you regardless of employment
- Coverage is paid for by the individual and benefit can be tax free
- If you become disabled and need the coverage, the monthly payments and length of coverage are based on what you qualified for at the beginning. (i.e. when you completed application and were approved, you selected coverage and benefit years)
Now that you know a little about how each works, let’s dive a little deeper and explain some of the challenges.
Group Disability –
Probably the biggest challenge is for high income earners. Most group plans cap how much one can get covered for. Typical caps for group plans are around $5K or $6K per month. This means if you make $200K and are only covered for $6K a month and you become disabled, your income will drop from $200K to $72K (That is only 36% of current income)
Another challenge is if your income is other than W-2 (meaning the employer taxes that income). Commissions and bonuses could be 1099 income. (Meaning that you will be responsible for paying both employer and employee taxes) If this is the case, than the 1099 income could be excluded from the coverage. An example could look like this
Joe Smith (if we use averages)
- W-2 income of $60K
- Commissions of $60K
- Bonus of $20K
Total income that Joe Smith makes is $140K. If he becomes disabled and is covered by a group plan that only covers w-2 income, than he would receive $36K (60% of $60K) a big drop in salary and certainly a big shock when he receives his first check!!!
Individual Disability –
Maybe the biggest challenge will be the cost to cover your true income, whether that is w-2, 1099 or a company distribution. It is much more expensive because you will be paying to cover more of your income and have a longer term contract for coverage.
The other challenge is qualifying for coverage. Although underwriting has improved throughout the years, I still find that many of my clients have challenges getting approved as applied or approved but have exclusions. Even though I call this a challenge, before my clients start the process, setting expectations first is a big help.
So what plan is best for me?
If you are a high income earner or if you earn a living through bonus or commissions that is 1099, looking at an individually owned contract may make the most sense.
On the other hand, if your only income source is W-2, than looking at a group plan could be the best option.
But if you have a high income that is a mix of W-2 and 1099, then looking at a blend of group and individual could be an option. If you do consider this, please make sure to get the individual plan in place first before you add the group plan. The reason is that the individual plan will ask if you have other disability protection and if you do, then that will reduce how much the personal plan will cover you.
Lots of information on a very high level and I would recommend working with a trusted independent advisor who can help navigate each of the plans, dissect and breakdown what you are purchasing. If we can be a resource with this planning or any other needs, please connect with us at www.ifgatl.com