Individual disability insurance is a type of insurance policy that provides income replacement benefits to an individual in the event that they become disabled and are unable to work.
Unlike group disability insurance, which is typically provided as an employee benefit, individual disability insurance policies are purchased by individuals directly from insurance companies.
Individual disability insurance policies can be customized to meet the specific needs of the individual, and can provide a range of coverage options, including:
- Benefit amount: The amount of income replacement benefits that will be paid to the individual in the event of a disability.
- Waiting period: The length of time that the individual must be disabled before benefits begin.
- Benefit period: The length of time that benefits will be paid to the individual in the event of a disability.
- Definition of disability: The specific criteria that must be met in order for the individual to be considered disabled and eligible for benefits.
Individual disability insurance policies can be particularly useful for individuals who are self-employed, or who do not have access to group disability insurance through an employer. However, they may be more expensive than group coverage and may require more detailed underwriting, including medical exams and financial documentation.
Advantages of Individual Disability Insurance Policies over Group Disability Insurance Policies
There are several advantages of individual disability insurance over group disability insurance, including:
- Portability: Individual disability insurance is owned by the individual and is not tied to a specific employer or association. This means that the policy can be maintained even if the individual changes jobs or leaves the association, providing continuity of coverage.
- Customization: Individual disability insurance policies can be tailored to meet the specific needs of the individual, including benefit amount, waiting period, benefit period, and definition of disability. This allows for greater flexibility in designing a policy that meets the individual’s unique circumstances.
- Coverage amounts: Individual disability insurance policies may offer higher benefit amounts than group coverage, providing greater income replacement in the event of a disability.
- Underwriting: Individual disability insurance policies typically require more detailed underwriting, including medical exams and financial documentation. This may result in a more accurate assessment of the individual’s risk profile and may lead to more favorable policy terms.
- Tax benefits: Premiums paid for individual disability insurance are typically paid with after-tax dollars, which means that benefits received under the policy are not subject to income tax. This can provide a significant tax advantage over group disability insurance, which may be subject to income tax if the premiums are paid by the employer.
Individual disability insurance lawsuits are typically governed by state law, while ERISA disability lawsuits are governed by federal law.
Individual disability insurance policies are typically purchased directly by the individual from an insurance company and are governed by state insurance laws. This means that disputes over claims denials or terminations are typically litigated in state court, and state law governs issues such as the interpretation of policy language, the burden of proof, and the standard of review.
ERISA disability policies, on the other hand, are typically provided as a benefit by an employer or association and are governed by federal law. This means that disputes over claims denials or terminations are typically litigated in federal court, and federal law governs issues such as the interpretation of policy language, the burden of proof, and the standard of review.
One important difference between the two types of policies is the standard of review that applies to claim denials. Under ERISA, courts generally review claim denials under a deferential “arbitrary and capricious” standard, which gives the insurer a significant amount of discretion in interpreting policy language and making claim determinations. In contrast, state law may provide for a more favorable standard of review, such as “de novo” review, which allows the court to independently review the claim and make its own determination.
It’s important to understand the differences between state law and federal law when evaluating the advantages and disadvantages of individual disability insurance versus ERISA disability insurance, and to consult with a knowledgeable insurance professional or attorney to help assess the potential legal implications of each type of policy.
If you are considering purchasing a disability insurance policy or have recently purchased a policy, we will help you understand the coverage afforded by the policy with a free policy analysis. As part of our analysis, we will explain what everything means to you in your situation. We will help you understand what you are entitled to and whether there are deficiencies in your coverage that could be problematic in the future.