Can You Have More Than One Disability Insurance Policy?

Disability insurance provides a portion of an individual’s income if they become sick or injured and are unable to work. This type of insurance helps protect people from financial losses when an accident or illness prevents them from earning their regular income.

The Possibility of Multiple Policies

Individuals can hold more than one disability insurance policy. This often involves combining employer-sponsored (group) policies with individual policies, or holding multiple individual policies, especially for those with high incomes or specialized professions.

Group disability insurance is typically offered through an employer or organization, providing a basic level of income protection. These policies are often more affordable, sometimes even provided at no cost by the employer, but they are usually tied to employment and are not portable if an individual changes jobs. In contrast, individual disability insurance policies are purchased directly by an individual, offering more control over coverage details and portability. Individual policies generally have higher premiums but offer more comprehensive benefits and are underwritten based on the applicant’s individual health and occupation.

Reasons for Acquiring Multiple Policies

Individuals acquire multiple disability insurance policies for a more comprehensive financial safety net. Combining policies enhances coverage limits, ensuring financial obligations can be met even if a single policy is insufficient.

One primary motivation is to achieve a higher total income replacement percentage than a single policy might offer. Group policies often cap benefits at a percentage like 50% or 60% of base salary, frequently with a maximum monthly benefit, which can leave higher earners underinsured. An individual policy can supplement this, increasing the total replacement percentage, sometimes up to 85% of pre-disability income. It can also cover additional income sources like bonuses or commissions not typically included in group plans. Different policies might also offer varied features, such as distinct waiting periods, benefit periods, or riders, allowing for customized protection. For instance, a short-term policy with a brief elimination period can bridge the gap until a long-term policy with a longer elimination period begins paying benefits. Policies from different sources, such as employer-provided versus personal coverage, also offer diversification.

Coordination of Benefits

When an individual holds multiple disability insurance policies, the coordination of benefits becomes important during a claim. This process determines how each insurer contributes to the total payout, preventing over-insurance, which is when combined benefits exceed an individual’s pre-disability income. Insurers typically include “other insurance” clauses in their policies to manage this, limiting the total payout to a predetermined percentage of the individual’s pre-disability earnings, often ranging from 60% to 80%.

For example, if a policyholder is receiving benefits from a group long-term disability plan and also qualifies for Social Security Disability Insurance (SSDI), the group policy may reduce its payout by the amount received from SSDI. If the employer pays the premiums for a group policy, the benefits received are often taxable, whereas benefits from an individual policy paid with after-tax dollars are generally tax-free. This tax difference can impact the net income replacement, making individual policies more valuable for actual take-home pay.

The definition of “disability” within each policy also significantly affects coordination. Policies typically define disability as either “own occupation” or “any occupation.” An “own occupation” policy provides benefits if you cannot perform the substantial duties of your specific job, even if you could work in another field. In contrast, an “any occupation” policy only pays benefits if you are unable to perform any occupation for which you are reasonably suited by education, training, or experience. Many group policies start with an “own occupation” definition but may switch to “any occupation” after a certain period, such as two years, which can impact continued eligibility for benefits if you are able to perform a different type of work. Understanding these differing definitions across multiple policies is essential, as it determines when and how benefits from each policy will be paid.

Key Considerations for Multiple Policies

Transparency with all insurers during the application process is important when managing multiple disability insurance policies. Failing to disclose existing coverage can lead to complications or even denial of future claims, as insurers need a complete picture of an applicant’s financial protection. Each policy’s specific definition of “disability” is also a crucial detail, as these definitions, such as “own occupation” versus “any occupation,” can vary significantly and affect how combined coverage functions in a claim scenario.

The underwriting process for additional policies will involve a thorough assessment of any existing coverage to ensure that the total benefit amount across all policies does not exceed typical income replacement limits, which are usually between 60% and 85% of pre-disability income. Insurers aim to prevent over-insurance and maintain a financial incentive for individuals to return to work. Periodically reviewing all disability policies is important to ensure they align with current income, financial obligations, and evolving needs. Life events such as salary increases, career changes, or family additions can alter coverage requirements, making regular reviews important for maintaining adequate protection. This ongoing assessment helps in optimizing coverage and avoiding gaps that could arise from outdated policy terms or insufficient benefit amounts.