Private disability or ERISA? The best policy is both policies

By Terry Coleman

In years past, professionals who wanted a long-term disability policy would go out in the private market. These policies would protect them if they became unable to practice due to injury or illness. And if that doctor or other professional changed jobs, the coverage would follow them.

The insurance industry has stopped writing so much individual coverage. These days, insurers chiefly offer LTD policies through employers or professional associations. If you had to choose one or the other, an individual policy is generally preferable to a group plan. Actually, I recommend you carry both if possible. The overlapping coverage provides the greatest protection.

Pros and cons of individual disability insurance

Long-term disability insurance replaces your income if you become incapacitated for months or years. The industry standard is 60 percent of your pre-disability income. In a high-earning profession, that’s an important safety net.

Speaking in generalities, an individual LTD policy will have better benefits. For example, a private policy is more likely to have an “own occupation” clause. This does not require you to be “totally disabled” – it only requires you to be unable to resume your most recent position.  Because you are dealing directly with the insurer, a private policy may be more customized to your occupation and to your chief concerns. Also, because you are paying the premiums, your disability income is nontaxable. And the coverage is portable.

Perhaps just as importantly, an individual policy is subject to state law. If your claim is contested, there are good remedies under California law that you would not have under a group policy, which is governed by federal law.

The main downside of private policies is the significantly higher premiums and the availability. Because the industry has moved away from individual LTD, your plan may be subject to more policy restrictions if the coverage is offered at all.

Pros and cons of group disability insurance (ERISA)

In general terms, group LTD insurance tends to more affordable than individual policies. Your employer or professional association may subsidize part or all of the premiums. The downside of that subsidy is that your disability benefits are taxable in most situations.

Group policies usually offer fewer choices – including take-it-or-leave-it policy restrictions. For example, many employer-sponsored plans only provide “any occupation” coverage. This means that you are not eligible for benefits if you are able to work part-time or in a low-paying job. These disability claims are also frequently denied.

One of the biggest drawbacks of group disability plans is that they fall under the Employee Retirement Income Security Act (ERISA). This federal legislation is stacked heavily against policyholders. The insurance companies know this, so they will deny benefits and terminate claims in a high percentage of ERISA cases, knowing that the bar is high to appeal an adverse decision.

If you can, get both types of disability insurance

I recommend that clients carry both group coverage and an individual policy. That’s how I have my disability coverage as an attorney. If you can get both through the same insurer that is even better. It maximizes your protection that way. Pillsbury & Coleman recently represented a former partner of the accounting firm Ernst & Young where this layered coverage enabled us to secure disability benefits for that client. Aside from double coverage, the best protection is to get legal counsel if you experience or anticipate any pushback on your LTD claim.