Can Group and Private Disability Policies Work Together?

According to the Social Security Administration, a 20-year-old has more than a 25% chance of becoming disabled before reaching retirement age.  Not only would a disability happening early in life be devastating, think about it happening during your career. According to another source, 1 in 5 doctors will become disabled.

Loss of income for such a duration has the potential to cause significant financial hardship. And while Social Security Disability Insurance may help, it’s critical to understand that about two-thirds of initial applications are denied and the average SSDI payment is only $1,534 a month.

Disability coverage may be available through your employer, who may pay all or a portion of the cost for your coverage.

Employer plans typically pay up to 50% to 60% of your income. This limited coverage might not be enough to meet your bills, which is why you may want to supplement employer-based coverage with a personal policy. Supplemental policies may be purchased to cover up to about 70% of your income.

Replacement income can help provide peace of mind when you’re facing the stress and uncertainties that often accompany a disability. Despite the importance of maintaining financial stability, many individuals lack adequate coverage to defend against the risk of disability.

Employer-provided and individual coverage options should be coordinated with Social Security in order to ensure that short-term and long-term disability risks are mitigated.

Taxation of Disability Benefits

When you purchase a personal disability policy, the benefit payments are structured to be income tax-free. Consequently, you may not be eligible for coverage that equals your current salary since your take-home pay is always less.

If your employer paid for your coverage, then the income you receive generally will be taxable. If you paid for a portion of the employer-provided coverage, then the pro rata amount of the benefits you receive are structured to be tax-free.

Choices, Choices, Choices

Consider the waiting period before disability payments begin. A longer waiting period saves you money, but it also means that you may have to live off your savings for a longer period. You are the best judge of how much of this risk you are comfortable assuming.

You also may want to coordinate the waiting period with any short-term disability benefits you could have. For example, if your short-term disability covers you for 90 days, look to have at least a 90-day waiting period so that you can potentially lower the cost of the long-term policy.

Ask how a policy defines an inability to work. Some policies will say “the inability to do any job or task;” others will say “own occupation.” You may prefer the latter definition so you’re not forced to perform some less-skilled, lower-paid work. That type of work may not help you meet your bills. To help you through the complexities of this important topic, we offer this checklist: What Issues Should I Consider When Purchasing Disability Insurance. It covers key considerations, including:

  • Short-term and long-term needs
  • Federal benefits
  • Group and individual coverage options
  • Important features and variables
  • Tax implications

If you need an introduction to an insurance professional in our network, please let us know. Insurance is an important piece of your financial plan.

 

Sources:

Social Security Administration, 2024
Disability-Benefits-Help.org, 2024
SSA.gov, 2024
Investopedia.com, July 23, 2023
1 in 5 Doctors Will Become Disabled.

 

 

Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.

The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.  

Published for the blog on October 30, 2024 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.