Your employer already provides disability insurance. Do you need more?

If your employer is already providing you with disability insurance, that’s good.  Not all employers provide disability coverage as part of their benefit package.  However, the coverage being provided might not be adequate for your needs.  Does it provide a favorable definition of disability?  Are the coverage amounts enough?  Can I take the policy with me?  And what about the tax implications of any benefits paid?

Most disability insurance plans offered by employers are called ‘group’ plans, or ‘employer group’ plans.  That means the contract is written for a group of employees rather than one individual.  This provides the group with purchasing power, helping them garner better rates for the plan participants.  In addition, group plans can typically be purchased (or provided) without medical underwriting.  That means no lengthy health questionnaire to complete, no medical exam is required, and no blood or urine samples need to be provided.  Instead, the insurance company ‘underwrites’ their risk by spreading it across a larger group of individuals (the employees).  So these plans can make it easy for employees to obtain coverage at reasonable rates.

But group plans can also come with some draw-backs.  Plans can be designed generically for the entire group, where the nurse practitioner, the maintenance staff and the oncologist might all receive the same coverage.  That might not be in the best interest of the oncologist, who would benefit from an ‘own occupation’ definition of disability rather than one using ‘any occupation’ language.  In addition, the coverage amounts might not be adequate.  A common standard used in determining coverage amounts is the 65% rule.  A person making $200,000 taxed at a 35% rate would only take home ($200,000-$70,000 in tax = $130,000 net pay).  A group disability plan with a 65% of salary benefit, would pay this particular person $130,000 per year if they were to become disabled ($200,000 salary x 65% = $130,000).  So the benefit provided takes into consideration the net take home pay of the employee.  However, if the premiums are paid by the employer – the employee’s benefits would be taxed.  That means the $130,000 benefit is also taxed at 35%, reducing the net benefit to $84,500.

As a resident making $60,000 per year, as an example, you might want a disability policy with a $3,750 in monthly benefit.  That $3,750 benefit would provide you with $45,000 for the year.  Assuming you were in a 25% tax bracket, your $60,000 would net you $45,000 in after-tax take home pay ($60,000 salary x 25% tax rate = $15,000 tax).  But remember, if the premium is paid by the hospital your benefits will also be taxed.  In that case, you might want a policy with more than a $3,750 monthly benefit.

Another important consideration with an employer group policy is portability – or lack thereof.  If you change employers, can you take the policy with you?  If not, you might have to apply for coverage as an older physician which will increase your rates.  In addition, if you’ve developed any health-related issues your new policy could be rated as well.  This could increase premiums further and add potential exclusions to your policy.