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Can Group, Private Disability Policies Work Together?

According to The Council for Disability Awareness, a 35-year-old male has a 21% chance of becoming disabled for three months or longer, with the average disability lasting almost seven years.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 65% of initial applications were denied in 2012 and 93% 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 60% of your income.³ 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 generally 70-80% of your income.⁴

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 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”; 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.

  1. The Council for Disability Awareness, 2013
  2. The Council for Disability Awareness, 2013
  3. USA Today, May 7, 2013
  4. Forbes, April 11, 2013

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG, LLC, to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm.The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2014 Faulkner Media Group.

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