Many people who have group Long-Term Disability insurance provided through their employer are under the impression that their income is properly and fully protected. Although this is a nice benefit to have, group Long-Term Disability insurance is usually not what people expect it to be.
One of the most important parts of a Disability policy is the benefit amount it will pay in the event of a claim. With most group Long-Term Disability insurance plans, the benefit will be 60% of a person's income, up to a maximum benefit of $6,000 per month. Occasionally there may be a maximum of $10,000 per month, but not generally.
There are three main concerns with group Long-Term disability benefits that the average person may not know or think about. First of all, when group Long-Term Disability insurance is provided by an employer, the benefits are paid on a taxable basis. So, although one may be under the impression that he/she is covered at 60%, in all reality it is much closer to 45%. In the case of someone who qualifies for $5,000 of monthly benefit, if we assume a 25% tax bracket, a $5,000 monthly benefit will only end up creating $3,750 of income. Most people would not be able to survive with a shortage of income this great. Although many people are unaware of this issue, it is an important point to consider.
Additionally, group Long-Term Disability insurance will always have a maximum for monthly benefits. In a situation where the maximum benefit is $6,000, all employees earning above $120,000 will be capped off and thus will not truly be covered at 60%. Someone earning $150,000 per year will only have 48% of their income covered, which will dwindle down to 35% once the benefit is taxed. Again this is an issue that many people are not aware of, but can be severely affected by.
The final concern with group Long-Term Disability insurance benefits, for the purpose of this article, is that benefits can be offset by a number of other potential Disability benefits. For example, group Disability benefits will offset dollar-for-dollar with all family Social Security benefits a person qualifies for. Although Social Security benefits are very difficult to qualify for, this can still be a serious concern. Additionally, group Disability insurance may also offset with professional association Disability insurance. Essentially a person could be paying for benefits that he/she may never see. This issue may not seem terrible, but in the actual event of a Disability, people cannot afford to lose the additional benefits they may qualify for. Social Security benefits should be received in addition to Disability benefits, not be cancelled out by them
The solution to the gaps existent in group Long-Term Disability insurance is to supplement a person's group coverage with individual Supplemental Disability coverage. It is a way of creating additional income that is paid tax-free and does not offset with other benefits such as Social Security. A person's income is his/her greatest financial asset, and should be protected as such.