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Knowledge Center

Knowledge Center

Is the cost of disability insurance tax-deductible?
Are you taxed on disability insurance at time of claim?

Consider this flow chart:

 
Premium Cost

 
Plan Type Employer Employee Benefits During Disability
Wage Continuation Plan Pays premium and deducts as business expense Not taxable Taxable income
Bonus Plan Bonuses premium to employee and deducts as business expense Taxable income to employee Tax free
Personal - Employee pays with after-tax dollars Tax free

Tax Free Disability CoverageDisability Insurance Tax Deductible

Have you considered the difference between group and individually owned disability coverage?

Group Coverage or Trade Association Coverage
Individually Owned Coverage
  • Can be cancelled anytime by the employer or the insurance company.
  • Guaranteed renewable to age 65, conditionally renewable for lifetime.
  • Noncancelable by the insurance company as long as premiums are paid on time within the grace period.
  • Terminates when you change jobs.
  • Terminates when you reduce hours to work part-time.
  • Terminates when you are no longer a member.
  • Remains in force when you change jobs or occupations.
  • Remains in force regardless of the hours you work.
  • Does not require membership.
  • You do not own the policy.
  • Policy is owned by the employer or trade association.
  • You do not choose the policy provisions or quality.
  • You own the policy.
  • You choose the policy provisions and quality level.

Definition of disability; (most common):

  • During the first 24 months injury or sickness prevents you from performing the duties of your own occupation.
  • After 24 months injury or sickness prevents you from performing the duties of any gainful occupation.

Definition of disability:

  • Injury or sickness prevents you from performing the duties of your own occupation.
  • Benefits stop if you are able to earn income from some other occupation.
  • Benefits continue if you are able to earn income from some other occupation.
  • Benefits continue if you do earn income from some other occupation.

Benefits automatically reduced if you collect from:

  • Workers compensation
  • Social security disability
  • State disability benefits

Benefits not automatically reduced by other sources;

  • You choose whether or not to integrate with these sources at the time you purchase your policy.
Benefits received during disability are taxable to you. Benefits received during disability are tax-free.

Partial DisabilityDisability Coverage Partial Disability

What happens when you are only partially disabled?
In other words, you can work in your job, but at a reduced capacity.

Generally, companies offer two provisions to choose from:

Partial Disability

This provision commonly pays benefits:
  1. “after” you have been “totally disabled”; and
  2. collected total disability benefits; and
  3. Returned to work on a partial basis.

Partial benefits typically pay “half” of the total disability benefit amount for up to 6 months. These benefits are commonly paid when you return to work but continue to suffer a loss of time or duties. This provision is considered some what restrictive because your Waiting Period must be satisfied with days of Total Disability Only. This provision is usually the only one available when we underwrite blue-collar type occupational risks.


Residual Disability

This provision is much more favorable:
  1. Total disability is never required to collect Residual disability benefits
  2. Days of both total and/or residual disability will satisfy the Waiting Period
  3. The amount of the benefit payable is based upon your percentage of lost earnings.

Residual DisabilityDisability Coverage and Inflation

What about the effects of inflation?

Impact on a $7,000 monthly disability benefit:

 
No Inflation Rider
3% Simple Increases
Year
Monthly
Cumulative
Monthly
Cumulative
1
7,000
84,000
7,000
84,000
2
7,000
168,000
7,210
170,520
3
7,000
252,000
7,420
259,560
4
7,000
336,000
7,630
351,120
5
7,000
420,000
7,840
445,200
6
7,000
504,000
8,050
541,800
7
7,000
588,000
8,260
640,920
8
7,000
672,000
8,470
742,560
9
7,000
756,000
8,680
846,720
10
7,000
840,000
8,890
953,400
11
7,000
924,000
9,100
1,062,600
12
7,000
1,008,000
9,310
1,174,320
13
7,000
1,092,000
9,520
1,288,560
14
7,000
1,176,000
9,730
1,405,320
15
7,000
1,260,000
9,940
1,524,600
16
7,000
1,344,000
10,150
1,646,400
17
7,000
1,428,000
10,360
1,770,720
18
7,000
1,512,000
10,570
1,897,560
19
7,000
1,596,000
10,780
2,026,920
20
7,000
1,680,000
10,990
2,158,800
21
7,000
1,764,000
11,200
2,293,200
22
7,000
1,848,000
11,410
2,430,120
23
7,000
1,932,000
11,620
2,569,560
24
7,000
2,016,000
11,830
2,711,520
25
7,000
2,100,000
12,040
2,856,000
26
7,000
2,184,400
12,250
3,003,000
27
7,000
2,268,000
12,460
3,152,520
28
7,000
2,352,000
12,670
3,304,560
29
7,000
2,436,000
12,880
3,459,120
30
7,000
2,520,000
13,090
3,616,200

Consider the advantage of Compound vs. Simple increases:

 
3% Compound Increases
6% Compound Increases
Year
Monthly
Cumulative
Monthly
Cumulative
1
7,000
84,000
7,000
84,000
2
7,210
170,520
7,420
173,040
3
7,426
259,636
7,865
267,422
4
7,649
351,425
8,337
367,468
5
7,879
445,967
8,837
473,516
6
8,115
543,346
9,368
585,927
7
8,358
643,647
9,930
705,082
8
8,609
746,956
10,525
831,387
9
8,867
853,365
11,157
965,271
10
9,133
962,966
11.826
1,107,187
11
9,407
1,075,855
12,536
1,257,618
12
9,690
1,192,130
13,288
1,417,075
13
9,980
1,311,894
14,085
1,586,100
14
10,280
1,435,251
14,930
1,765,266
15
10,588
1,562,309
15,826
1,955,181
16
10,906
1,693,178
16,776
2,156,492
17
11,233
1,827,973
17,782
2,369,882
18
11,570
1,966,813
18,849
2,596,075
19
11,917
2,109,817
19,980
2,835,839
20
12,275
2,257,111
21,179
3,089,990
21
12,643
2,408,825
22,450
3,359,389
22
13,022
2,565,090
23,797
3,644,952
23
13,413
2,726,042
25,225
3,947,650
24
13,815
2,891,823
26,738
4,268,508
25
14,230
3,062,578
28,343
4,608,619
26
14,656
3,238,456
30,043
4,969,136
27
15,096
3,419,609
31,846
5,351,284
28
15,549
3,606,197
33,756
5,756,361
29
16,015
3,798,383
35,782
6,185,743
30
16,796
3,996,335
37,929
6,640,888

Disability Insurance TermsDisability Insurance Policies

Important Terms used in Disability Insurance Policies
Here are some common terms and their definitions:

Injury:
Any accidental bodily injury which occurs while this policy is in force.

Sickness:
Any illness or disease first manifested while this policy is in force. It includes complications due to pregnancy or childbirth. It includes normal pregnancy or childbirth after you have been disabled for 90 days.

Waiting Period:
The number of days you must be disabled before your policy will pay you any benefits.

Benefit Period:
The maximum period of time you receive income benefits during a disability claim.

Noncancelable And Guaranteed Renewable to Age 65:
You have the right to continue this policy to age 65 by paying the premium as due.
Until age 65, we shall not:

  • Cancel this policy except for nonpayment of premium; nor
  • Increase the premium; nor
  • Add any restrictions

Conditionally Renewable for Life; Subject to Premium Change:
You may renew this policy on each policy anniversary from age 65 for life, if:

  • You are actively working at least 30 hours each week at your usual place of employment; and
  • You pay the premium in effect at renewal time for your age at that time; and
  • You furnish proof at renewal time of your current income

However, after age 65 you may not renew any riders attached to this policy.

Your Responsibility:
It is your responsibility, at your expense, to submit to us records and statements needed to establish a claim of benefits. These include but are not limited to Internal Revenue records, attending physician’s statements, employment records, etc.

Disability CoverageDisability Coverage

Medical Examinations:
We have the right, at our expense, to obtain another medical opinion. We may have you examined by a physician of our choice as often as is reasonably necessary.

Fraud:
In the event this policy is procured by fraud or a claim is made with intent to defraud, this policy will be void. This provision shall control over all other policy provisions.

Incontestability:
After two years from the issue date of this policy, only fraudulent misstatements in the application for this policy may be used to void the policy for loss incurred or disability that starts after the two year period. However, prior to the two year period, we may void your policy if you made material misrepresentations in your application (period varies by state).

Grace Period:
A 31 day Grace Period is allowed for premiums not paid on or before due dates. Coverage will continue in force during the Grace Period.

Pre-Existing Conditions:
No claim for loss incurred or disability that starts after two years from the issue date will be reduced or denied because a disease or physical condition not excluded by name or specific description effective on the date of loss had existed prior to the issue date. As long as pre-existing conditions have been fully disclosed on the application and they are not specifically excluded by amendment, they will be covered.

Catastrophic Disability Rider:
Provides additional benefits if the insured is unable to perform two or more Activities of Daily Living (ADL) without standby assistance or if cognitively impaired. Activities of Daily Living are: dressing, toileting, transferring, continence and eating. If the ADL Benefit Period is to age 65 and the insured becomes ADL disabled prior to age 50, the benefit can pay for life. (Varies by company)

Daily Living RiderDisability Insurance

Common Exclusions

War
Benefits are not payable for a sickness, injury or disability caused or contributed to by war, declared or undeclared, or any act or incident of war, or as a result of military service when scheduled active duty is more than three months.

Self-Inflicted Injury
Benefits are not payable for sickness, injury or disability resulting from an intentionally self-inflicted injury.

Incarceration
Benefits are not payable during any period you are incarcerated for any reason.

Loss or Suspension of License
Except as a direct result of a sickness or injury, if you are prevented from engaging in your occupation as the result of suspension, revocation, or surrender of your professional or occupational license or certification, benefits are not payable.

Disability CoverageGroup Disability Insurance

Residence (living outside of the United States while disabled)
While you reside outside of the United States or Canada, we will not pay benefits for more than twelve months during the lifetime of this policy.

Note about policies when you are living outside of the United States: Some policies do not specifically state a limit on the benefit period for claims when you reside outside of the United States. All policies do however require that you are under the regular care and treatment of a physician appropriate for the condition causing disability. They also reserve the right to have you examined by a physician of their choice. As such, you would be required to be in the United States to periodically update the claim file and continue to be considered eligible to collect disability benefits during an approved claim. This is the case regardless of the insurance company you choose to purchase a policy from. Some exceptions may be considered on a case by case basis. Managing a disability claim here in the United States while you live abroad is understandably difficult and the accepted medical standards in the United States may be significantly different in other countries.

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