How to Insure Your Income: Group Disability Plans

When a firm implements a formal salary continuation program for key executives, it is customary that a similar program be installed for the benefit of all employees. Most often this will take the form of group disability income.

A group disability income plan may be in lieu of a formal salary continuation program -- and thus cover all employees, including the key employees. It also may be for those employees not covered by a formal sick pay plan.

Group benefits may be short-term or long-term. Short-term benefits are payable for up to one or two years -- most frequently, the short-term benefit period is one year. Short-term policies usually have short elimination periods -- such as 15 or 30 days.

Generally, the group disability policy is paid for by the employer on a tax-deductible basis. Benefits are taxable to the employee. But the plans may be funded on a payroll deduction basis, whereby the employees pay all or part of the cost of the plan.

In a payroll deduction plan, any contribution from the employee will not be tax-deductible to the employee, but any benefits received will be tax-free. (Payroll deduction plans may use individual disability income policies in lieu of group contracts, particularly if the entire premium is being paid by the employee.)

Many of the advantages common to the sick pay plan for key employees are applicable to group disability plans. These would include the factor of increased employee loyalty, improved work performance and the element of attracting and retaining good employees. The employees experience a degree of financial security, should they be struck with a total disability.

Under a group disability contract, there is normally no requirement for individuals to prove insurability. This enables someone who is a substandard risk to acquire disability income protection -- regardless of how shaky his or her health history or current physical condition may be.

Generally, group coverage will be less costly for the employee than individual coverage. For some high-risk professions, this is a valuable consideration.

A caveat: When an employee participates in group coverage, his or her coverage is basically rented. The employee does not own the policy. The employer is the policyowner. The employer can terminate the policy. If the employee terminates employment, the disability coverage also is terminated. Working for the employer is a condition of having the coverage.