Disability Insurance at Work... Am I Really Covered?
Disability insurance planning is an often overlooked aspect of your life. Are you guilty of assuming that "you have it at work"?
There are two major types of disability insurance available to employees; group long term disability (LTD) insurance, and individual disability insurance. A group long term disability insurance plan typically is designed to replace 60% of base salary to a monthly maximum spelled out in the policy. A majority of group LTD plans on the market typically cover 60% of base salary to a maximum of $5,000 a month. Notice that bonus income, as well as commission income is often not covered.
Group long term disability insurance benefits are taxable to an employee if the employer was paying the premiums for the coverage. The only way to make up the benefits due to lost taxes during a claim is to have purchased a supplemental disability insurance policy that layers on top of your group coverage before the claim ever happened. Having both group long term disability, and an individual policy allows you to have the maximum income replacement available during a claim. It also gives you the power to know that if your employer ever dropped the coverage, or you ever left your current position, that you would still have your own policy in-force.
Many people earning an income over $100,000 a year are severely underinsured when it comes to group LTD. Since the monthly maximum with group long term disability is often around $5,000 a month, any income over $100,000 a year should be insured with individual disability insurance in addition to the group plan.
Shortfalls of Group Long Term Disability Insurance
- Benefits are taxable if your employer pays the premium
- More restrictive definitions within the policy
- Many have a 2 year maximum on drug, alcohol, mental and nervous disabilities
- No rate guarantees
- Many do not cover bonus or commission income
Benefits of Individual Disability Insurance
- Benefits are received to you tax-free if you pay the premium.4
- Features designed to deliver benefits sooner and continue paying benefits for a longer duration.
- Higher monthly benefits up to $17,000 for most occupation classes
- Rate guarantees to age 65 or 67
- Fully portable if you ever leave your current job
- Non-Cancellable and Guaranteed Renewable provisions assure you that premium rates and policy provisions will not be changed as long as premiums are paid on a timely basis.
We always recommend to people that they supplement their group long term disability insurance with a small individual policy. The individual policy will lock in your income protection for the rest of your working years assuming you continue to pay the premiums, and provide you with a higher income replacement should you ever experience a claim. Having both types of coverage takes you from living off of 40% of your income after taxes, to almost 70% of your income after taxes. An individual disability insurance supplemental plan is worth every penny in our opinion since it gives you the comfort of knowing that your income will always be protected regardless of your employers plan, regardless of whether or not you ever leave your current job, and regardless of whether or not you ever have a change in health history.
|Liberal definitions, allowing more claims-paying scenarios.||Yes||No|
|Protects incentive income||Yes||Not Typically|
|Protects retirement savings||Yes||No|
|Tax-Free benefits||Yes||Not Typically|
4. This website is provided for informational purposes only and should not be considered tax or legal advice. Please contact your tax or legal advisor regarding the tax treatment of the policy or policy benefits. You should consult with your own independent tax and legal advisors regarding your particular set of facts and circumstances. The information provided is not intended or written to be used, and cannot be relied upon, to avoid penalties imposed under the Internal Revenue Code or state and local tax law provisions.