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Group disability plans differ from individually underwritten plans in several important respects. The most common differences between group and individual disability coverage are:
Group plans usually express benefits as a percentage of the worker's income, while individual policies usually specify a flat dollar amount.
Short-term group plans usually provide maximum benefit periods of 13 to 52 weeks (26 weeks being the most common), with weekly benefits of 50% to 100% of the individual's income. Individual short-term plans have maximum benefit periods of 6 months to 2 years. Short-term plans are generally not renewable.
Group long-term plans provide maximum benefit periods of more than 2 years, with monthly benefits usually limited to 60% of the individual's income.
Group disability plans also carry minimum participation requirements — usually requiring an employee to have worked 30 to 90 days before becoming eligible for coverage.
Group plans usually make their benefits supplemental to any benefits received under Workers Compensation.
Some group disability plans limit coverage to nonoccupational disabilities only.
Know This
Group disability plan benefits are based on a percentage of the worker's income; individual policies specify a flat amount.
There are two major reasons group insurance is typically obtained instead of individual coverage:
Most people obtain health and disability coverage as an employee benefit. The economics of group underwriting make coverage cheaper than individually underwritten coverage, since the group as a whole is underwritten together and reduced rates are possible because of the lower potential for adverse selection.
Employer-paid premiums are deductible as a business expense, and the amount of the premium is not taxable income to the employee. This means an employee would need to receive additional compensation greater than the premium the employer pays in order to purchase an equivalent level of benefits on an individual basis.
There are, however, disadvantages to group insurance. In recent years the trend has moved away from traditional fee-for-service arrangements toward plans that build a closer relationship between provider and insurer — HMOs, PPOs, and point-of-service plans. These "managed care" arrangements contain cost-containment provisions that can leave subscribers with fewer independent choices for medical care.
Another disadvantage for insureds under a self-funded plan is that if the plan is discontinued, there is no right to convert coverage to an individual policy.
The following are disadvantages of self-insurance more broadly:
It can leave the organization exposed to catastrophic loss (an exposure that can be eliminated by purchasing reinsurance or stop-loss coverage);
Costs may vary more widely from year to year than projected (which could cause the loss of tax deductions in years when there are no profits against which to deduct losses); and
Self-insurance can create adverse employee and public relations, since the organization itself — rather than an insurance company — makes the determination of which losses are covered or rejected.