Presented by Tim Dreher
I’m sure that most of you who market Disability Income Protection have heard this before, perhaps even many times. Personally, I actually like it when I hear that response from potential clients. Either it tells me that they were savvy enough to recognize the need for Income Protection and did something about it, or it was provided to them by their employer as a “one size fits all” benefit that may not fit their individual needs. Either way, I have an opportunity to expand on the DI discussion.
Let’s take a moment to look at some of the reasons that an employer provided plan may not be all it’s cracked up to be.
With an employer sponsored plan you normally have to take whatever plan design and benefits the employer offers regardless of whether the employee is paying for a portion of or even the entire premium. In my experience, most of these plans can have very limited monthly benefit amounts, limited or no riders (such as residual or partial disability benefits) and limited benefit periods (generally 2-3 years in length), even though many disabilities can last longer than 5 years, and in some instances, even for a lifetime. Employers, unfortunately, have to choose plans that fit the masses. As an example, what might be a good fit for a dental hygienist is probably not the best plan for a dentist.
Another point to consider is that those individuals that are in occupations that rely on commissions or bonuses for a large part of their income might also come up short as most employer provided plans use only the individual’s base salary when calculating any benefit payouts. This can leave those employees woefully underinsured.
Portability is another reason that an employer sponsored plan might not be the best fit. An employer sponsored plan typically ends when the job ends, whereas an individual plan follows that employee to their next job or even to self-employment. The risk remains the same so why shouldn’t the insurance plan remain the same also?
Finally, in my opinion, perhaps the biggest reason to consider an individual plan is how employer sponsored plans are taxed versus an individual plan. If an employer is providing the disability plan and paying the premiums then any benefits received from the plan would more than likely be taxable. This also holds true if the employee is paying the premiums out of their own pocket but on a pre-tax basis, then again any benefits received would likely be taxable. This could possibly mean a 20-40% reduction in any benefits received after the benefits are taxed. An employee thinking they are adequately insured could potentially find out the hard way (at the time of claim) that they are only getting a portion of what they thought they would receive.
The bottom line is that most employer provided plans can, and do, provide some benefits, which is better than no benefits at all. However, an individual DI plan is very flexible and can be tailored to provide additional coverage and fill in those gaps that an employer’s plan might be missing.