Group Long Term Disability Against an Individual Policy

The most expensive misunderstanding in group coverage is not about health or dental. It is about the disability line on the benefit summary, and it goes like this: an employee reads a replacement share, performs one piece of mental arithmetic against their salary, arrives at a monthly figure, and files it away as settled. Years later a claim is made and the amount that arrives is smaller, sometimes very much smaller, and it is taxable when they expected it not to be. Nothing has gone wrong. Nobody has acted in bad faith. The booklet figure was a gross starting point that three provisions then acted on: the definition of disability that applies after the first stretch of a claim, the offset that reduces the benefit by public plan payments and other income, and the tax rule that turns on who paid the premium. This article sets out all three, and then the question people actually ask, which is whether an individual contract belongs beside the group one.

What the booklet figure is, and is not

A group long term disability provision typically states a share of earnings, sometimes with a ceiling, sometimes with a different share above a threshold. That statement is arithmetic on gross pre disability earnings and it is where the calculation begins rather than ends. Between it and the deposit that reaches an account sit three separate mechanisms, and each of them is capable of moving the amount substantially.

The order in which they act matters. The definition of disability decides whether anything is payable at all, and it can change part way through a claim. The offset provision decides how much of what is payable is actually paid by the plan rather than by someone else. And the tax rule decides how much of that reaches the household. A reader who understands only one of the three will still be surprised.

None of this is hidden. All of it is in the booklet, and more precisely in the master policy the booklet summarises, which an employee is entitled to ask for. It is simply that the three provisions are in different sections, written in different registers, and nobody reads a benefit booklet in the year they are well.

The definition, and the point at which it changes

Whether a claim is payable is decided by a definition, not by a diagnosis. The two ends of the range are own occupation, which asks whether you can perform the substantial duties of your own occupation, and any occupation, which asks whether you can perform the duties of any occupation for which you are reasonably suited by education, training or experience. The second is a far harder test to satisfy, and the words reasonably suited do most of the work in it.

Group plans very commonly use the more generous test for an initial period, often the first two years of benefit payments, and then apply the any occupation test to everything after that. The practical consequence deserves blunt statement: a claim can be approved, paid monthly, entirely legitimately, and then terminate at the two year mark with no change whatever in the claimant’s medical condition. The test changed, and the same facts produce a different answer under it.

Individual contracts vary at least as much, and the strongest own occupation wording is generally found there. But the label is not the clause, and two documents that both say own occupation can differ on whether a specialty is assessed as the specialty or as the broader profession. The full treatment is in Own Occupation or Any Occupation.

The offset, which is where the money goes

Group long term disability plans are built to integrate with other sources of income rather than to sit on top of them. The plan promises to bring a claimant up to a level, and where another source is already paying part of that level, the plan pays the difference. That is the offset provision, and it is the reason a benefit statement so often shows a number far below the one the employee calculated.

Disability benefits under the Canada Pension Plan and the Quebec Pension Plan are the most common offset. Many plans require a claimant to apply for them, and some estimate the amount and reduce the benefit whether or not the application succeeded. That is why the eligibility rules for the public plans matter to a private claim. Service Canada requires an applicant to be under 65 and to have contributed in 4 of the last 6 years, or to have at least 25 years of contributions including 3 of the last 6, and the disability must be both severe and prolonged, meaning that it regularly stops the person from doing any type of substantially gainful work and that it is long term and of indefinite duration or likely to result in death.

Retraite Quebec applies its own conditions to the Quebec Pension Plan disability pension: contributions in at least 2 of the last 3 years, or 5 of the last 10, or half of the contributory period with a minimum of 2 years, and a disability that is severe and permanent. One difference is worth knowing. For contributors aged 60 to 64, Retraite Quebec applies a gentler test, being unable to do the work usually held, with recent contributions required. And the additional amount for disability has not been paid to new beneficiaries since 1 January 2024.

Public plans are not the only offsets. Workers compensation, automobile insurance indemnities, employer paid sick leave, income from another disability contract in some wordings, and earnings from work during a partial recovery can all reduce the amount the plan pays. Which of them apply, and whether the plan offsets the primary benefit only or the dependants’ benefits too, is set out in What Reduces a Disability Benefit.

The all sources maximum, and why layers do not stack

Sitting above the individual offsets is a ceiling, usually called the all sources maximum or the overall maximum. It caps the total income a claimant may receive from every source the plan counts, expressed as a share of pre disability earnings. When the total would exceed it, the plan reduces its own payment until the total sits at the ceiling.

This is the mechanism that defeats the intuitive strategy of simply buying more coverage. An employee who holds group coverage, then purchases a second layer of a kind the plan counts, may find that the new layer displaces the group benefit rather than adding to it. Two premiums are paid and one benefit arrives. The plan is not misbehaving; the arithmetic was fixed the day the master policy was written.

The design conclusion follows directly. What matters is not the total amount of coverage held but the order in which it was bought and whether each layer is of a kind the others count. That distinction is settled by reading both documents together rather than either one alone.

Who paid the premium, and why it changes the number most

The Income Tax Act treats employer contributions to a group sickness or accident insurance plan generously at the front end. Subparagraph 6(1)(a)(i) excludes the value of benefits derived from those contributions from the employee’s income, so the premium is not taxed as it is paid. The reckoning comes later.

Paragraph 6(1)(f) includes in income amounts received under a disability or income maintenance insurance plan to which the employer has contributed, reduced by the employee’s own contributions to the plan. Read together, the two provisions produce the rule that governs most group disability claims in the country: where the employer paid the premium, the monthly benefit is generally taxable; where the employee paid it with after tax dollars, it generally is not.

The size of that difference is why a deduction on a pay statement for a benefit the employer otherwise covers should never be read as meanness. It is usually the arrangement that leaves the employee materially better off in the situation the coverage exists for. Individual contracts are almost always paid personally with after tax dollars, which is the ordinary reason an individual benefit arrives untaxed, and it is why comparing a group replacement share with an individual one without adjusting for tax compares two unlike things.

The non evidence maximum, and who it quietly fails

A group plan issues coverage to everyone in a class without individual medical underwriting, which is its central advantage and the reason it exists. That automatic issue is not unlimited. Every plan carries a threshold, called the non evidence maximum, above which further coverage is available only if the individual employee provides evidence of insurability and is accepted.

The consequence is counterintuitive and it runs in one direction. Employees whose earnings are modest are typically covered at the stated share of their earnings without difficulty. Employees whose earnings are high enough that the stated share would exceed the threshold are covered up to the threshold and no further unless they did something about it, which most did not, because the form arrived with the enrolment package and looked optional.

So the group plan tends to cover the smallest incomes best, in proportional terms, and the largest incomes worst. The threshold is stated in the plan documents and it is a question that can be answered this week rather than at claim time. How the amount itself is worked out is set out in How Much Disability Insurance.

Portability, and what happens when the employment ends

Group coverage belongs to the plan, and the plan belongs to the employer. Long term disability coverage therefore generally ends when the employment ends, and unlike group life insurance, which often carries a conversion privilege into an individual policy, group long term disability commonly carries no conversion right at all. The coverage simply stops.

The consequence lands at the worst possible moment. Someone who changes employers in their fifties, or is laid off, or leaves to work for themselves, discovers that the coverage relied on for twenty years is gone, and that replacing it now means being medically underwritten at an age and a health status that make the answer worse than it would have been at thirty five.

The plan can also change while the employment continues. A group plan is a contract between the employer and the insurer, renegotiated at renewal, and definitions, offsets and maximums are all capable of moving in a way no individual employee consents to. What happens on the way out is covered in Group Benefits When You Leave a Job.

Where an individual contract sits

The honest position is not that an individual contract is better. Group coverage is issued without underwriting, is generally cheaper for the coverage obtained, and covers people who would struggle to buy anything individually. Advising someone to decline it is almost never right, and this page is not doing that.

The position is that the two do different jobs. An individual contract is owned by the individual, so it does not end with a job. It is medically underwritten once, at the outset, so its terms are fixed at the health status of the day it was issued rather than of the day it is needed. Its definition, its offset wording and its treatment of other income are in a document the owner holds, not one an employer renegotiates.

That is why the arrangement people end up with, when they think it through, is usually both. The group plan carries the base, and an individual contract covers the part the non evidence maximum left out, or provides the portable layer that survives a change of employer, or supplies the definition the group plan gives up at month twenty five. Whether that fits any particular person is a question for a licensed insurance professional working from both documents.

The order to do this in

Read the group plan first, because it is already in force and it defines the gap. Four things are needed from it: what definition applies and when it changes; what the offsets are and whether public plan disability payments are estimated or actual; what the all sources maximum is; and whether the premium is paid by the employer or by you, which decides the tax.

Then find the non evidence maximum and compare it with the coverage your earnings would otherwise produce. If the second is larger than the first, the difference is the uncovered portion and no amount of assuming will close it.

Only then does the question of an individual contract become answerable, because only then is it clear what the contract would be for: the amount above the threshold, the portability, the definition, the tax treatment, or some combination. Buying before that sequence is done is how people end up paying two premiums into one all sources maximum.

What to ask, in plain words

Of the plan administrator or the employer: what is the definition of disability and at what point does it change; what income sources are offset and are they estimated or actual; what is the all sources maximum; what is the non evidence maximum and am I above it; who pays the premium; and may I see the master policy rather than the summary.

Of anyone proposing an individual contract: how does this interact with the offset and the all sources maximum in the plan I already have; can the insurer cancel it or change its terms, and on what conditions; what definition applies and for how long; and does it contain a residual or partial provision, since a contract that pays fully or not at all is a poor match for how most recoveries actually proceed.

Every one of those has a written answer in a document somebody holds. The answers are not on this page, and they are not in a benefit summary either. They are in the master policy and in the contract, and the time to read both is now rather than in the month a claim is filed.

Frequently Asked Questions

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Read Own Occupation or Any Occupation for the definition in full and What Reduces a Disability Benefit for the offset provisions one at a time. The CPP Disability Benefit covers the public plan that most commonly reduces a group benefit, and Group Benefits When You Leave a Job covers the departure. The Group Insurance guide holds the rest.