Can Group, Private Disability Policies Work Together?

can group private disability policies work together gretchen stangier blog certified financial planner portland oregon

According to the Social Security Administration, a 20-year-old has a 25% chance of becoming disabled before reaching age 67.¹

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 67% of initial applications were denied in 2013 and about 90% of SSDI recipients receive less than $2,000 a month.²

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% 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.³

Taxation of Disability Benefits

When you purchase a personal disability policy, the benefits 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 being. 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 to how much of this risk you are comfortable assuming.

You may also 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 on 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”; other 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.

¹ Social Security Administration, 2015

² The Council for Disability Awareness, 2015

³ Bankrate.com, 2015

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