Self-Employed Disability Insurance

Group and Individual Disability Insurance Differences

Self-employed individuals are often confused as to the differences between group and individual disability insurance plans.  There are a number of differences in practical, real-world terms, though there is also substantial variation within each category — as such, no absolute statements apply to all group or individual disability plans.

Commonly seen differences include:

Cost

Individual disability insurance coverage tends to be more expensive than group coverage, as a general rule, but individual policies tend to be less strict in their terms (for example, an individual policy may have a looser, own-occupation definition of disability, whereas a group policy may have a stricter, any occupation definition of disability) and more generous in their benefits. Individual disability insurance is also typically underwritten specific to you—your medical history, the type of work you perform, etc… In order to obtain this type of coverage, a blood test or medical examination may be required.

Customization

Generally speaking, individual disability insurance plans tend to be more customizable.  Various optional riders may be available, such as cost of living adjustment, partial or residual disability benefits, or lifetime benefits. These can give you an opportunity to truly personalize your coverage to suit your particular needs.

Portability

Individual insurance coverage is portable — in other words, it is irrelevant whether you continue in your current employment capacity. Your disability insurance coverage will still apply. Group insurance coverage is not portable, by contrast, and will terminate when you end your employment.

Individual Disability Insurance Policies Are Not Governed by ERISA Regulation

The Employee Retirement Income Security Act (ERISA) governs employer-sponsored benefits plans, including disability benefits plans. Disability insurance coverage purchased by self-employed individuals are not governed by ERISA regulation, however.

This is not necessarily a bad thing. In fact, though ERISA was originally created with the intent of protecting the rights and interests of policyholders, over time, it has developed into a bulky and complicated regulatory scheme that — in many cases — works against the interests of disability policyholders.

For example, under ERISA, you would not be entitled to bring an action against your insurer for bad faith mishandling of your disability claim. If the insurer unreasonably delayed the processing of your disability benefits claim in the hopes of discouraging you from securing recovery, ERISA would not give you a right of action for bad faith (and thus access to a potential punitive damages award).

With individual disability coverage, by contrast, your claims are governed by state law — not federal ERISA regulation — and as such, you are entitled to bring a bad faith action against your insurer, which may lead to significant compensation.