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Don’t Let Your Employer Treat You to Disability Insurance

It’s very rare when a company offers a free benefit that an employee should pass on…

  • 401k matching contribution? – Yes Please!
  • Three weeks paid vacation? – Don’t mind if I do!
  • Group disability income insurance – Um, no thanks, I’ll pick up that premium myself.

I’m not suggesting you shouldn’t take advantage of your employer’s group disability plan, I’m simply suggesting that you don’t let them pay for it. Why? Because when an employer pays for your disability income insurance, it deducts the premiums as a business expense. If you were to become disabled and claim benefits, those monthly payments would be taxable at ordinary income rates. If, on the other hand, you paid for your premiums with after-tax dollars, those monthly benefits would be considered tax-free income. This could make a big difference in the percentage of income you can replace, particularly for higher income earners.

For example, let’s say you earn $250,000 per year and your employer offers a group disability plan which covers 60% of that income with a maximum monthly cap of $15,000 and your after-tax premium per paycheck is $40 ($960/year). Let’s further assume that your effective tax rate is 30%. Your net income would then be approximately $175,000. Let’s look at the outcome given the following two scenarios:

  • Your Employer Paid Your Premiums – You become disabled and go on claim. The monthly benefit would be $12,500, and this income would be taxable. Your net benefit would be $8,750 per month ($105,000 per year) or 60% of your net income. You would have saved that $960 / year, which could potentially add up over time and may increase with age.
  • You Paid Your Premiums with After-Tax Dollars – You become disabled and go on claim. The monthly benefit would be $12,500, and this income would be tax free. Payments would total $150,000 per year or 86% of your net income.

Disability income insurance is one of those few benefits that you should typically pay out of your own pocket. The premiums tend to be cheap, and the tax-free benefits can make a big difference should you become disabled. Not all plans allow employees to pay for their own premiums with after-tax dollars. Check with your benefits department and discuss with your financial advisor and tax advisor.

Important Disclosure Information

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic. This information is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide tax advice. Please remember to contact your tax advisor prior to implementing any tax strategy.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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