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Group disability income: short-term and long-term disability compared with individual plans

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Group disability income at a glance

Group disability income insurance replaces part of a worker's paycheck when illness or injury keeps them from working. An employer (or other eligible group) holds a single master policy, and each covered worker receives a certificate of insurance describing their benefits. Group disability is sold in two distinct layers: short-term disability (STD) and long-term disability (LTD). They are designed to work together, one after the other.

A horizontal timeline begins at the moment a disability starts. On the upper row, short-term disability begins after a very short wait of zero to seven days and pays for thirteen to twenty-six weeks, at about fifty to seventy percent of weekly pay, usually for non-occupational disabilities only. On the lower row, the long-term disability elimination period runs from the same starting point for ninety to one hundred eighty days, shown as a dashed waiting box under the short-term benefits. A dashed vertical line marks the handoff: at about the time short-term benefits end, long-term benefits begin and continue for years, often to age sixty-five, at about fifty to sixty-six and two-thirds percent of monthly pay, reduced by Social Security and similar income. A note at the bottom says that when the employer pays the premium the benefits are taxable, and when the employee pays with after-tax dollars the benefits are tax-free.
Group STD pays first; LTD's elimination period runs underneath it and LTD takes over about when STD ends.

Short-term disability (STD)

  • Elimination period: very short. A common design pays from the first day of an accident and the eighth day of a sickness (often written "1/8" or "0/7").
  • Benefit period: short, usually 13 to 26 weeks, occasionally up to 52 weeks.
  • Benefit amount: a percentage of weekly earnings, typically 50% to 70%, usually with a weekly maximum.
  • Scope: most group STD plans cover only non-occupational disabilities, because workers' compensation already pays for job-related injury and illness.

Long-term disability (LTD)

  • Elimination period: long, commonly 90 to 180 days, and often set to end at about the time STD benefits run out so the two plans dovetail.
  • Benefit period: long, often to age 65 or Social Security normal retirement age, or for a stated number of years.
  • Benefit amount: typically 50% to 66 2/3% (60% is common) of monthly earnings, subject to a monthly maximum.
  • Scope: usually covers both occupational and non-occupational disabilities.
  • Definition of disability: a common "split" definition: own occupation for the first 24 months, then any occupation the person is reasonably suited for by education, training and experience.
  • Offsets (integration): group LTD benefits are normally reduced by other income the disabled worker receives for the same disability, such as Social Security disability benefits, workers' compensation and state-mandated disability benefits. The plan pays the difference up to its percentage.

Group plans compared with individual plans

Underwriting. Group coverage is usually issued without individual medical underwriting, up to a guaranteed-issue limit, because the insurer underwrites the group as a whole. Eligibility rules (full-time status, a probationary period, being actively at work) replace health questions. Individual disability income policies are usually individually underwritten for health, occupation and income.

Cost. Group coverage is cheaper per dollar of benefit, thanks to group rating and lower administrative cost. Employer-paid (noncontributory) plans must enroll all eligible employees. Contributory plans, where employees share the cost, require a minimum participation level, typically 75%.

Portability. Group coverage generally ends when employment ends. Some LTD plans offer a conversion or portability option, but it is not guaranteed. An individual policy belongs to the insured and follows them from job to job.

Contract terms. An individual policy can be noncancelable or guaranteed renewable, can lock in an own-occupation definition for the whole benefit period, and can add riders such as cost-of-living, future increase options and residual (partial) disability. The employer can change or cancel a group plan, and group LTD carries the offsets described above, which individual policies usually do not.

Benefit level. Group benefits are often capped at a lower monthly maximum, so higher earners frequently buy individual coverage to supplement group LTD.

Taxation: the exam favorite

If the employer pays the premium, the premium is deductible to the employer and not taxable to the employee, but the benefits are taxable income when received. If the employee pays the premium with after-tax dollars, the benefits are received tax-free.

When the cost is shared, benefits are taxable in proportion to the employer's share of the premium. Personally owned individual policies are bought with after-tax dollars: the premiums are not deductible, and the benefits are tax-free.

Key terms

Sample questions

What is the typical benefit period for group short-term disability (STD) coverage?

  • Until age 65
  • Five to ten years
  • 13 to 26 weeks
  • No more than 7 days
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