Long Term Disability Insurance: Group Coverage vs. Private Policies

For many professionals, the ability to earn an income is the largest financial asset they own. Disability insurance is meant to replace part of that income if illness or injury prevents work, and employers often offer it during fall open enrollment.

What group long-term disability coverage commonly provides

Group long-term disability (LTD) coverage is purchased by an employer for its employees. Policies commonly pay a percentage of base salary, often around 60%, up to a monthly maximum, after an elimination period during which no benefit is paid. Many policies also reduce the benefit by other income the person receives, such as Social Security disability benefits or workers’ compensation.

Two features of group coverage affect high earners in particular. First, covered earnings often include only base salary, which can leave bonuses, commissions and equity compensation outside the benefit calculation. Second, the monthly maximum can be lower than the percentage of a high salary. The benefit is therefore a smaller share of total pay than the stated percentage suggests. Group coverage generally ends when employment ends, though some policies allow the person to convert or port the coverage, and the terms are in the certificate of coverage.

Own occupation and any occupation

The definition of disability determines when benefits are paid. Under an own-occupation definition, a person is considered disabled when unable to perform the main duties of their own occupation, even if able to work in another field. Under an any-occupation definition, a person is disabled only when unable to perform any work for which they are reasonably suited by education, training and experience.

Own occupation is a feature of a disability policy, not a type of disability insurance, and it appears in both group and private coverage. Group policies vary. Some use an own-occupation standard for an initial period, often 24 months, and then switch to an any-occupation standard. Many employers offer group policies with an own-occupation definition that runs through age 65, which is more common for higher-paid legal and senior executive roles and at companies with generous benefit packages. Private long-term disability (private LTD) policies are offered by independent carriers, and individuals can buy them on the open market. They can also offer own-occupation coverage, sometimes to age 65 or 67. A modified own-occupation definition applies when a person is working in another job, and it pays only if the person is not working in any occupation. Because the wording differs by insurer and by policy, the policy contract is the controlling document.

Features of private long-term disability policies

Private disability insurance is purchased from an independent carrier and owned by the person, so it generally stays in force when the person changes jobs, provided that premiums are paid. A noncancelable policy generally cannot be canceled and has a fixed premium, while a guaranteed renewable policy cannot be canceled but the insurer may raise premiums for a class of policyholders. Common optional riders include residual or partial disability benefits, which pay when a person can work part time or with reduced income, cost-of-living adjustments and the right to increase coverage later without new medical review.

Private policies are underwritten based on age, health, occupation and income, so coverage may cost more or be limited if the person has existing medical conditions. Some employers offer voluntary or supplemental LTD policies at open enrollment, with different underwriting rules than private long-term disability policies. Our article on umbrella liability insurance covers a separate type of coverage that high earners also review.

How disability benefits are taxed

The taxation of benefits depends on who pays the premium and how. Under Sections 104 and 105 of the Internal Revenue Code, benefits are generally included in income when the employer pays the premium or when the employee pays with pre-tax dollars. Benefits are generally not taxable when the person pays the premium with after-tax dollars. A policy that looks adequate before tax can therefore pay a different amount after tax than expected, and the same monthly benefit can have different results under each arrangement.

Claims and legal framework

Employer-sponsored group coverage is generally governed by the Employee Retirement Income Security Act of 1974 (ERISA), which sets claim and appeal procedures and limits the remedies available in court. Private policies are generally governed by state insurance law and contract law. The Social Security disability program applies a strict definition that requires inability to perform substantial work for at least 12 months, which differs from most private policies. In 2026, monthly earnings above $1,690 ($2,830 for people who are blind) are generally treated as substantial gainful activity.

What to look for in a long-term disability policy

• What percentage of total pay the group benefit would replace, including bonuses and equity compensation.
• The monthly maximum benefit and how other income reduces it.
• The definition of disability, the length of the own-occupation period and the maximum benefit period.
• Whether premiums are paid with pre-tax or after-tax dollars, and how that affects the tax on benefits.
• Whether coverage can be kept or converted if employment ends.
• The elimination period and whether savings and sick leave can cover it.
• Which riders matter, such as residual disability and future increase options.

Policy language decides what a claim pays, so the definitions and exclusions deserve a careful read. A licensed insurance professional can explain specific policies, and your adviser can discuss how income protection relates to the rest of your planning.

This article is provided by Austin Wealth Management for general educational purposes only. It is not financial, investment, tax or legal advice, it does not consider your individual circumstances, and it does not create an advisory relationship. Austin Wealth Management provides advice and services only under a signed advisory agreement, and the terms of that agreement govern. Rules and limits change, so information here may not be current. Consult a qualified financial professional before making financial decisions.