Disability Insurance: Asked and Answered

Can I Buy Short-Term Disability Insurance Through My Employer?

It depends on whether your employer offers it. Short-term disability coverage is an important benefit that increasing numbers of employers are providing. In some states, employers are even required to offer such coverage.

If your employer offers short-term disability coverage, you'll first want to find out if you're eligible to participate in the group plan. You may have to satisfy certain eligibility requirements, such as being employed full-time with the company for a specified number of days before you're eligible to enroll in the plan. Also, you'll want to know whether you will have to answer medical questions and meet underwriting standards to qualify. Ask your HR department or manager.

Next, you'll want to find out how the disability insurance premiums are paid. Does your employer pay the premiums for you, or must you pay part of each premium through payroll deduction? This may affect your decision to buy, and it may also affect the federal income tax consequences if you ever receive disability benefits.

How Can I Reduce The Cost Of Disability Insurance?

Start by finding out if you're eligible for disability benefits from a group disability insurance plan. For the most part, group insurance is less expensive than individual policies. Keep in mind, however, that group insurance offers fewer and less flexible benefits. You'll want to check with your employer, insurance agent, professional association, or state insurance department to find out what group plans you're eligible for.

If group disability insurance is not available to you or if you need additional coverage, there are several strategies you can use to make individual disability coverage more affordable:

Lower the monthly benefit you would receive if you became disabled. Most disability income insurance policies offer a range of benefit amounts that you can choose from.

Increase the waiting period before benefits begin to match up with a short-term disability policy. Waiting periods can range anywhere from one month to several years. If you decide to lengthen the waiting period, commit yourself to establishing an emergency cash fund that will cover your expenses during that time.

Check your policy to see if you're paying for any optional coverages you could do without and can omit from your policy.

Shorten your benefit period. Typical benefit periods include one, two, five years, and up. However, exercise caution. This strategy may be the least cost effective if your benefits stop before your disability ends.

Note: Before you make a decision on disability insurance, review your financial situation to see how much coverage you need. One of the dangers in trying to reduce the cost of disability insurance is that you'll end up with a policy that doesn't adequately protect you. So always buy the best coverage you can afford. Sometimes, however, it comes down to this: Either you buy no disability insurance or you buy a low-cost policy. In this case, any coverage you buy is better than no coverage.

Are Disability Insurance Payments Taxable?

Federal income taxation of disability insurance benefits depends on what type of benefits you receive, whether the premiums were paid with pretax or after-tax dollars, and who paid the premiums (you or your employer).

The disability proceeds are taxable to you if your employer paid all of the disability premiums for you and did not include the amount in your gross income, or if your employer paid you directly while you were disabled. If you paid all of the premiums with after-tax income, or if your employer made the contributions and included the amounts in your gross income, any disability insurance benefits paid to you are exempt from tax.

If your employer pays part of each premium and you pay the balance with after-tax dollars, you won't owe income tax on any disability benefit that can be attributed to your portion of the premium. However, you will owe taxes on the portion that can be attributed to your employer's contribution.

For example, Mike contributes $30 per month (after tax) to a disability plan. His employer also contributes $30 per month to the same plan. Mike becomes disabled. Under the terms of the disability insurance contract, Mike receives $3,000 per month for each month he is disabled. Since Mike's employer paid 50 percent of the disability premiums, 50 percent of the benefits will be subject to tax, and $1,500 per month will be subject to income tax.

Different rules may apply if you receive disability benefits through a government disability program, such as Social Security, Veterans Administration, or the military. In addition, different rules apply to workers' compensation. For more information, consult a tax professional.

Do I Need My Own Policy If I Own Disability Insurance Through My Job?

First, how much disability insurance do you have through your employer, and what other financial resources do you have? Other resources might include your savings, property or assets you could sell, borrowed money or your spouse's income. Now ask yourself if the combination of your employer-sponsored disability insurance and your other resources will be enough to pay your bills, and for how long, if you suddenly become disabled. Unless you're independently wealthy, chances are good that your personal financial resources won't carry you through a long-term disability. Also, the money you've saved is probably earmarked for goals other than disability--your retirement or your children's education, for example. You might have to deplete these accounts to pay your bills.

Some employers do not offer long-term disability insurance. If your employer does, look closely at the policy. Review the monthly benefit and the length of the waiting and benefit periods. Is the monthly payment enough to pay your bills? The typical group policy covers 60 percent of your income, up to a maximum amount. But is income defined as your base salary, or does it include bonuses, commissions and overtime? How long is the waiting period in your employer's disability policy? This is the length of time before any benefits are paid to you. Often, an employer's disability policy coordinates with the company's sick pay policy. You may have to use up all of your paid sick days before the disability policy begins to pay benefits. You need to plan on having cash available to cover any gaps in coverage.

If you decide to supplement your employer-sponsored policy with one of your own, make sure the two policies coordinate in ways that work for you. For example, if you need to increase the monthly benefit, be sure your own policy will pay concurrently with your employer-sponsored policy.

Be sure to bookmark LCD's Blog, Why It Matters, for the latest helpful tips and articles: https://www.lcdinsurance.com/blog

#disabilityinsurance #disability #disabilityquestions #LCDInsuranceServices #WhyItMatters