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The Key Differences Between Employer-Sponsored and Individually Purchased Long-Term Disability Insurance

There are two main types of long-term disability insurance; individually purchased and employer-sponsored. It’s important to be aware of the defining characteristics of each, as they have a major bearing on you as a policyholder and claimant.

Your insurance policy’s status as either employer-sponsored or individually purchased will have implications in terms of cost, taxation, the extent of benefits, claims and appeals processes and the definition of disability.

Benefits Under Employer-Sponsored vs. Individually Purchased Long-Term

Disability Insurance Plans

Generally, individually purchased policies will have more extensive benefits and greater consumer safeguards than their employer-sponsored counterparts. These plans are tailored to underwrite you specifically, rather than giving you one-size-fits-all benefits along with your work colleagues. You can modify your policy to make sure you’re paying for the coverage you want and exclude anything you don’t need.

The percentage of working income replaced through monthly disability insurance benefits is typically higher on individually purchased policies. Additionally, elimination periods are often shorter, and other plan features tend to be more advantageous for individual policyholders.

Rules & Regulations

Most employer-sponsored long-term disability insurance policies are subject to a body of federal legislation known as the Employee Retirement Income Security Act of 1974 (ERISA). This federal law sets rules and minimum standards for insurance carriers (as well as certain mandatory procedures for policyholders and claimants) that apply across all 50 states. While the federal court jurisdictions have interpreted the Act’s provisions in various ways, the underlying principles are the same regardless of where you live in the US. Employer-sponsored plans are often called ERISA policies and provide very little incentive for the insurance company to timely pay a claim.

Individually purchased long-term disability insurance policies, on the other hand, are governed at the level of the state. This means the rules and requirements can vary considerably depending on what part of the country you reside in, but you will be able to take discovery and have a real trial on the merits before a jury with punitive damages and emotional distress damages often available.

The Cost of Policy Premiums

As employers cover the cost of ERISA disability policy premiums, they’re much more affordable than a private plan. Of course, if you wish to supplement an employer-sponsored policy with your own coverage, you have options in this regard.

You may choose, for example, to pay for an individual long-term disability insurance policy with a shorter elimination period than your ERISA group plan. This means you will receive monthly benefits from your individual policy before the waiting period on your employer-sponsored policy kicks in. Additionally, you may be able to contribute to a disability insurance plan alongside your employer, depending on the benefits scheme at your place of work. Some workers do this through what is called a “cafeteria plan,” where you can select from a range of benefits and make contributions on a pre-tax basis.

The Portability of Coverage

Since ERISA policies typically come as a benefit, they don’t stay with you when you leave one company for another; you’ll lose your coverage as soon as you terminate your relationship with the company paying your premiums. However, an individual long-term disability insurance policy covers you specifically and is not tied to your job or employer. If you move from one job to another, your individual policy coverage will remain unchanged; it will apply during a period of unemployment, depending on the limitations of your contract.

The Taxation of Benefits Under Individual vs. Group Insurance Disability Plans

As a general rule, monthly benefits arising from employer-sponsored policies are taxable. Conversely, payments from individually purchased plans usually do not give rise to an income tax liability, as long as you pay your premiums using post-tax dollars. This is because the authorities hold that you have discharged your liability once you pay for insurance coverage using money on which you’ve already paid income taxes.

If you need help with a taxation issue after a successful long-term disability insurance claim, you should consult with a professional who specializes in the field.

The ERISA Appeals Process

The mandatory appeals process that follows a denied initial claim on an employer-sponsored policy is one of the most crucial differences between the two categories of long-term disability insurance. If you receive a denial of benefits after claiming on an individual policy, you can simply take your insurance carrier straight to state or federal court and file your lawsuit. This is not the case with employer-sponsored plans.

Under the ERISA appeals process, you must first compile and submit a timely administrative appeal of all the medical, vocational, and financial evidence related to your case, usually within 180 days of receiving your notice of denial. If your ERISA insurer denies your claim at this point, you are then free to sue, but there are serious limitations.

Firstly, you can only file your lawsuit in federal court, because that is where ERISA cases are heard. Additionally, you don’t have the right to a jury trial. Instead, judges simply consider the evidence from the denial and what was submitted in the administrative appeal and rule. Crucially, you cannot introduce any new evidence at this point; only the records you submitted during your initial claim filing and administrative appeal are eligible for consideration.

When to Call a Long-Term Disability Insurance Lawyer

If you get in a dispute with your insurance carrier over a long-term disability policy, whether it’s an individually purchased or an employer-sponsored plan, you’ll need expert legal help to give yourself the best possible chance of emerging with monthly disability insurance benefits. Our Ohio ERISA attorneys have experience in dealing with all kinds of claims, employer-sponsored and individually purchased, large and small, in every state in the nation and we win.

Contact DarrasLaw today to schedule a free initial consultation, including policy analysis, claim assistance, or appeal assessment free of charge.

DarrasLaw is Americas' most honored and decorated disability litigation firm in the country. Mr. Darras has seen more, evaluated more, litigated more, and resolved more individual and group long term disability and long-term care cases than any other lawyer in the United States.

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