Should You Get Individual Long-Term Disability Insurance In Addition To The Group One?

In my opinion, long-term disability insurance is probably one of the most important but overlooked insurance for young professionals. If you are in your 20s, 30s, or even 40s, what do you think is your biggest financial asset? Money in your bank? Your car? Your house? Many of you may not realize that the most valuable financial asset you currently have is probably the value of your future income. Long-term disability insurance is a great tool to help you protect it. Most of you are probably having some group coverage through your employers. So, the question really comes down to whether you should add additional individual coverage on top of the group one. This week I will share with you how to get a quick answer to this question in three simple steps.

Step 1: Get an idea of how much long-term disability insurance you need.

Like other financial planning topics, it depends on your specific situation. My rule of thumb is that you should have at least 60% of your total income covered.

Step 2: Figure out whether the amount of coverage you get from the group policy at work is enough to cover your need.

Most group policies cover 50% - 70% of your gross income. However, it doesn't necessarily mean that you have enough coverage by default. Here are two common reasons.

  1. Most group policies calculate the percentage based on your base salary only. Bonuses, commissions, and stock compensations are often not included.
  2. Many group policies have a dollar-amount cap on the maximum amount of benefits you can get in addition to the percentage amount. 

Let's look at a real example here. A well-known technology company provides a long-term disability benefit of 60% of monthly salary up to a maximum of $10,000 per month to its employees. For an engineer making about $400,000 a year ($250,000 base salary + $150,000 bonus and stock compensations), the maximum amount of disability benefits he can potentially get from the group policy is $10,000 per month or $120,000 per year which is only 30% of his total income.

Step 3: Understand the potential benefits of an individual policy.

Even though you have enough amount of coverage, an individual long-term disability insurance policy may still be worth considering because of its potential benefits. Here below are four of them.

  1. Broader definitions of income

    Unlike many group policies, an individual policy can cover your bonuses, commissions, and even stock compensations if designed properly.
  2. Narrower definitions of disability

    The definition of disability in most group policies is "Any Occupation". It generally means that you will qualify for the benefit only if you are unable to perform any substantial and material duties of any gainful occupations you are reasonably suited based on your education, training, and experience. 

    On the other hand, you can choose a narrower definition of disability in an individual policy. There are a couple of options. The best of which is called " Ture Own Occupation". Under this definition, you will receive the benefit as long as you cannot perform the material and substantial duties of your current occupation.

    Here is a typical example.  A surgeon injures his/her operating hand permanently and can no longer perform any surgeries. He/she decides to become a faculty in a medical school. He/she has an individual long-term disability policy with specifically defined "True Own Occupation" in addition to the group policy with "Any Occupation". In this case, he/she will receive benefit payments from the individual policy but nothing from the group one.
  3. Tax-free benefits

    Many group policies are offered to employees for free. It generally means that the employer pays the premium and does not include it in your gross income. In this case, any disability benefits you receive down the road will be subject to the income tax.

    In contrast, an individual policy is usually paid by after-tax money which makes the actual benefit amount income tax free.

    Actually, some employers give you an option to pay taxes on the cost of the coverage first and make the disability benefits tax-free later. The problem is that many of you probably don't even know you have that option.

In summary, long-term disability insurance is a great tool to help you protect your future income. I cannot emphasize enough the importance of protecting the most valuable financial asset that young professionals have in their 20s, 30s, or even 40s. If the coverage you get from work is not enough, I highly recommend you get an additional individual policy based on your specific situation. For people who have a great group policy at work with enough amount of coverage, I also recommend you consider adding an individual policy to get a better coverage for the sake of peace of mind.


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