10 Shortcomings of Group Long Term Disability Insurance

Updated July 27, 2025

Would it surprise you to learn that Group Long Term Disability insurance (LTD) is not actually optimized for the purpose of providing individual financial security? While it does provide a basic level of income protection, group LTD stops short of what individuals would prefer because the employer wants to keep premium costs down and to induce employees back to work. This limits how far it can go in serving the needs of individuals, for whom the whole point of the insurance is financial security, and to some extent choice and control.

This article outlines the ten (10) greatest shortcomings of group LTD insurance for the purpose of setting realistic expectations and deciding whether to buy a personal DI policy to supplement it. The gaps of group LTD can be summarized as follows:

1. Meeting the definition of disabled may depend on the feasibility of other work.

2. 60% is probably not enough, especially after the loss of the employer's medical insurance subsidy is taken into account.

3. The actual benefit is less than 60% due to formulaic adjustments.

4. The benefit is further reduced to the extent certain other sources are available.

5. The benefit may be taxable.

6. Coverage may be lost or reduced just before claim as a result of work changes.

7. Coverage is tied to a single employer.

8. With each new employer, a new Pre-Existing Condition Limitation period applies.

9. Special limitations apply to certain types of claims.

10. ERISA makes it harder to prevail in a contested claim.

Let's flesh these out in greater detail.

1. The definition of disability generally allows the insurer latitude to account for how the job could be performed differently. This may factor in reasonable accommodations, technology assistance and consideration for how the occupation is generally performed in the national economy.

When the claim is two (2) years old or so, the insurer can get even more creative because at that point, the definition of disability will typically broaden to an "any occupation" test, which considers ability to work in any other occupation. This matters more for highly compensated employees than rank-and-file employees due to the greater potential loss of earnings and job satisfaction.

Some professional groups such as law firms may have specialty-specific language, which does help for purposes of qualifying as disabled, but doesn't help to get living standards up, which is the next problem.

2. It's not enough, especially after medical insurance is accounted for. A standard group LTD benefit is 60%, which may sound feasible when it's all theoretical, but reducing lifestyle is not easy due to the fixed nature of financial commitments related to housing and children. Plus, people are reluctant to make large cuts early on if there is a possibility of recovery, no matter how unlikely.

One major financial hit relates to medical insurance premiums. When the employee is no longer actively at work due to disability, they lose eligibility for the employer's medical insurance subsidy. They don't necessarily lose the health insurance itself due to COBRA, but they do lose the subsidy, which is a new financial burden.

Don't forget, upon disability, medical insurance premiums are funded by the individual through COBRA, without employer financial support. That's about a $2,000-$4,000 per month increase in personal expenses counting deductibles and out-of-pocket costs, depending on the plan and family size.

Also, retirement contributions stop during a period of disability, which is a real financial loss that will hit later, especially if there was any employer contribution such as 401(k) match. What will replace these? Being forced to retire early is not something most people are prepared for.

A working spouse doesn't help as much one might hope because the spouse is pulled away from their own career to pick up the slack at home, which can compound the household income loss, or at a minimum, cause incredible stress. If disability is severe, it may be necessary to hire help for care or supervision (i.e., long term care). If that happens, even 100% income replacement may not be enough.

3. Formulaic adjustments reduce the benefit below 60%. Once an insurer agrees that disability exists, the natural response is "Great! How much is my benefit?" Then, silence. This is not a simple question because group disability benefits have to be calculated.

The formula begins with filtering out forms of compensation other than what falls under the definition of covered earnings. Bonus pay, commissions, and other incentive pay are usually excluded because the infrequency of payment complicates volume tracking and for most months isn't present at all when disability begins. Small business owners that take significant portions of compensation in non-salary form (e.g., S-corporation ownership distributions, K-1 earnings) sometimes don't get what they need personally unless the policy is specifically designed for that.

There is also an absolute cap on the group LTD benefits such as $10,000 per month. At that level, anyone earning more than $200,000 per year is effectively "capped out."

Finally - and most importantly - the calculation of benefits is pegged to current earnings which may itself be depressed due to a gradual decline in health that may be years in the making before claim occurs. Known as the cancellability problem, the issue centers on the tradeoff between work flexibility and preserving pre-disability earnings for purposes of a potential future claim. Because work flexibility usually comes with adverse compensation or employment changes, the basis of any future benefits will also change. The following situations are of special concern due to the perversity of poor health being the cause of the cancellation:

• Slow-moving chronic conditions, because people may intentionally downshift in the hopes of holding on (causing a partial cancellation via reduction in compensation basis).

• People who downshift to the point where they become ineligible by hours to deal with their own health issue

• Applying for benefits unsuccessfully, followed by a subsequent attempt after the situation worsens, only to find that eligibility has been lost during the interim period due to termination of employment.

Although there are some policies that can mitigate the cancellability problem, true non-cancellable guarantees are only available in the form of individual policies.

After all of these adjustments are made, it is not unusual for people to receive only 25% income replacement based on total earnings in a normal year.

4. Offsets for certain other sources reduce the benefit. That 60% benefit includes Social Security and other government benefits. There may be additional offsets for third party recoveries, which compels a disabled person to participate in legal proceedings that will result in no personal benefit whatsoever. Other common offsets include PIP auto coverage, distributions from employer funded retirement plans, pension disability benefits, severance pay, and of course, work earnings. The effect of all these offsets is to reduce the insurer's claims expenses and, of course, to apply sufficient financial hardship to induce a person back to work.

5. Taxes are usually withheld from the group benefit. This one is the least universal. Broadly speaking, only one side of the cash flow can be tax advantaged. Most employers choose to take their tax advantage on the front end (when the premium is paid) because it is certain and immediate, knowing that any future benefits will be taxable to employees. Employers structure their programs this way in order to avoid the additional load on the premium and minimize current taxes to the business, especially as it concerns payroll taxes.

6. Eligibility may be lost just before it's needed. When faced with a health problem, employees often choose to "power through" by taking a reduced hours instead of going on disability claim. The problem is that group disability coverage has a minimum hours requirement for eligibility, so the well-meaning and hard working employee ends up cutting themselves out just when the need is coming into view.

Even if the minimum hours can be maintained, the fact that benefits are based on a percentage of earnings immediately prior to disability means that any reduction in earnings will result in a proportionately smaller disability benefit if a claim is later filed.

In theory, these problems shouldn't happen as a result of the very thing being insured against. But in practice, employees are not very careful about documenting cause and effect, and harm their own case by claiming that they were not disabled early on. The upshot is that group LTD has structural impediments to choice and security.

7. Dependence on an employer makes it less reliable. Many things can trigger a loss of eligibility, including voluntary departure or as part of a reduction in force.

8. Pre-existing conditions are typically excluded during a person's first year of employment, and this needs to be re-satisfied with each new employer. There is no credit for prior disability coverage at another employer, which is different than medical insurance. For workers that regularly job hop and have long bench times, such as CFO's, it is not uncommon to have deficient coverage most of the time.

9. Special limitations on how long benefits last may apply to certain types of claims. Typically, the special limitation is twenty-four (24) months, which cuts short claims that otherwise may have gone to age 67 or so.

Nearly universal in group LTD insurance is the limit on psychological and substance claims, often referred to as the mental-nervous limitation or the "psych limit." Exactly what counts as a psychological condition is typically determined by the most current version of the Diagnostic and Statistical Manual of Mental Disorders (the DSM), which is encompassing enough to make the psych limit surprisingly relevant even for people who have no relevant history.

Unexpectedly broad application of the special limitations clause can occur. DSM-listed conditions can enter the picture downstream of treating conditions even of non-psychological origin, say, as the result of a botched operation or as a side effect of prescribed pharmaceuticals. Questions can arise over whether disability is more closely attributed to the underlying malady or the psychological effects that followed, complicating the claim and providing the insurer with an out. Finally, "caused or contributed by" language can potentially open up the field for insurers to apply the two year limitation where the primary cause of disability is not psychological at all.

Some group policies have a vastly more expansive set of special limitations that also encompass environmental, musculoskeletal and self-reported subjective claims such as pain.

10. The Employee Retirement Income and Security Act (ERISA) puts employees at a disadvantage in the event of a claims dispute. Although ERISA was intended to protect employees, is has been turned on its head when it comes to disability. ERISA is disadvantageous for workers due to (a) the higher burden of proof, (b) limited room to pivot a case, (c) an obligation to exhaust other remedies first, and (d) there is no possibility of punitive damages in ERISA cases, which means the insurer has little to lose by putting up roadblocks. So they do.

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"That's Just What's On Offer"

There isn't a lot employers can do. Even the most paternalistic employer would have a hard time bolstering the protection aspects of LTD because many of the barriers are inherent to group policy ownership, regulatory requirements, and risk spreading.

It is possible to make enhancements, but they tend to be short-lived. That's because after a few years, it is difficult to remember why certain quality improvements were made, especially with HR turnover and a CFO pressuring the benefits team to find savings. And, since cost savings are measurable and quality is abstract, quality loses.

Seasoned benefits professionals have a good defense: "that's just what's on offer." They simply resign to market limitations. Besides, no employer claims to eliminate the need for individual financial responsibility.

The Role of Individual Disability Income Insurance (DI)

Individual disability insurance can supplement group coverage and pay claims separately, which has the effect of raising total income replacement. Known as individual Disability Income insurance (IDI or DI), this kind of insurance is characterized by stronger guarantees and features, in particular the non-cancellable "true" own-occupation variety, which locks in the terms of coverage and allows for moonlighting in a different occupation without being penalized.

DI allows individuals to control their own destiny. Properly designed, it can also allow a person to be flexible on the terms of work without compromising future benefits and return to work with far greater economic security. In short, DI is the most practical solution to group LTD's shortcomings.

How Group and Individual Disability Insurance Compare

Let's look at a side-by-side comparison of group Long Term Disability and individual Disability Income insurance.

It is important to appreciate both types for what they are. LTD's basic nature makes it possible for employees to have something in place with maximum convenience and minimum cost. Group LTD has a limited objective. Notwithstanding the gaps discussed here, LTD plays an enormously positive role in the financial well-being of workers who will not seek out, qualify for, or pay for anything else.

But for people with good jobs and a big nut to crack every month, group LTD probably shouldn't be relied upon as the only source of income protection.

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