Disability Insurance Through Work vs. Your Own Policy
Learning goal: Compare employer group disability insurance with an individual policy on cost, taxes, portability and definitions, and decide whether to add your own.
Short answer
Employer group long-term disability is often fully paid by the employer and typically replaces about 60% of salary, but benefits from an employer-paid plan are generally taxable, and coverage usually ends if you leave the job. An individual policy costs you a premium, but it stays with you, and benefits from a policy you pay for aren't taxable.
Read to the end to complete this lesson.
On this page
The Fuller Picture
Many people use both: the group plan as a base, and an individual policy to fill the gap left by taxes and the 60% cap, or for features like an own-occupation definition. Check your group plan's definition of disability, its benefit period and whether it reduces payments by Social Security benefits.
Key Takeaways
- Triple-I: group long-term disability is usually "fully paid for by employers, with no contribution expected from employees."
- When you receive employer-paid disability income, you must pay income tax on the benefits.
- IRS: if you paid the premiums on a policy, the benefits you receive under it aren't taxable.
- Group coverage is generally tied to the job; an individual policy stays with you.
- Ask whether your employer's plan counts Social Security when calculating your disability pay.
Real-World Example
Sam
Sam earns $8,000 a month. His employer's long-term plan replaces 60%, $4,800, but because the employer pays the premium, the benefit is taxable, leaving about $4,000 after tax. Sam's bills are $5,500, so he buys a small individual policy paying $1,500 a month, tax-free because he pays its premium. If he changes jobs, the individual policy goes with him.
Common Mistakes
- Forgetting that employer-paid benefits are taxable.
- Assuming group coverage follows you to a new job.
- Not checking whether the group plan offsets Social Security.
- Buying an individual policy without knowing what the group plan pays.
Interactive Exercise
Compare What Each Would Pay After Tax
Enter the monthly benefit from each option, after any tax.
Arithmetic only, on the numbers you enter. Nothing is estimated.
Knowledge Check
Question: Your employer pays the full premium for your long-term disability plan. How are the benefits generally taxed?
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- Insurance Preparedness Checklist: Twelve insurance questions worth having an answer to, with a place to learn more about each one you have not looked at yet. No score.
Related Insurance Terms
Related Scenarios
Questions to explore next
Questions readers often ask next about this topic:
- How much would my employer plan pay after tax?
- Does my group plan offset Social Security?
- Should I add an individual policy?
- What happens to my coverage if I leave my job?
See every lesson in the Disability Insurance course.
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The factual claims on this page were checked against these sources. Rules and figures change, so check the source itself if you need to confirm the current version.
Educational information, not advice: This lesson is for general education only, not legal, financial, or insurance advice. Actual coverage, discounts, and requirements depend on your policy’s wording, your insurer, and the laws of your state. Confirm specifics with your own insurer or a licensed agent before making a decision. Insurpedia does not sell insurance and does not recommend specific insurers. Policy features are from the Insurance Information Institute; tax rules from IRS Publication 525; Social Security rules from the Social Security Administration. Policies differ. Educational information, not tax or financial advice.