‘There may be a false sense of security.’ How to know if your workplace disability insurance is enough

If you’ve opted into your company’s group disability insurance plan, you may assume there’s sufficient income protection if you can’t work due to illness or injury. But experts say your workplace coverage may not be enough.  

John Ryan, founder and CEO of Ryan Insurance Strategy Consultants, urges employees to embrace group disability insurance, but warns “there can be a false sense of security with the employer plan.” 

For employees, group disability insurance offers guaranteed coverage at low or no cost, but you need to know what’s “under the hood,” he said, speaking at the Financial Planning Association’s annual conference in Seattle on Wednesday.

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It’s estimated that 35% of private industry workers have access to workplace long-term disability insurance plans and 43% have access to short-term disability coverage, according to a September report from the U.S. Bureau of Labor Statistics.

There are two types of group disability insurance: short-term, which pays a temporary benefit, and long-term, which lasts for an extended period of time.

You’ll want to check the plan’s “exclusions and limitations,” outlined in the policy’s summary plan description, Ryan said. If anything raises a red flag, speak up and ask for clarification. 

It’s also important to know how much income is covered, since some policies protect only your base salary, not bonuses or commission. What’s more, you need to know whether the benefits received are before or after taxes, Ryan said.  

Another key detail is how your group plan defines disability, Ryan said. The most generous definition, “own occupation,” allows you to collect benefits if illness or injury prevents you from working in your current profession. Another, “any occupation,” means you’re not able to work any job.

Ryan said company plans typically use “own occupation” definition for the first two years of a claim. Once the definition changes, it may be harder to claim disability benefits if you can still work another job. It’s most difficult to claim benefits with the “any occupation” definition.

However, many policies are “more favorable than people think,” after the two-year period, he said. For example, the definition may include “the significant and substantial duties of an occupation that’s reasonable based on prior training, education and experience,” he said. 

“That’s a lot better definition,” Ryan said. “Reasonable” has been determined by the court system to be an occupation where you must earn at least 60% of your previous income within a 12-month period. “So that rules out selling pencils on the street corner,” he said.

If you discover shortfalls in your group disability plan, it’s possible to “cover the gaps” with an individual policy, Ryan said. But it can be a “tough underwriting process” and pricing may be a concern, he said.

However, individual policy pricing may be more flexible with certain features scaled back, Ryan said. It’s more important to have “some level of coverage” than to skip extra protection when it’s needed, he said.

For guidance, Ryan encourages consumers to tap an experienced disability insurance broker who works with more than one company. 

Currently, 14% of consumers have individual disability insurance coverage, down from an all-time high of 31% in 2012, according to LIMRA, an organization of financial services and insurance companies.