There are many different employee benefits that you have available to you from your employer. One of these options of benefits could be for disability insurance. I want to walk you through what disability insurance is, why it is important, and the difference of the tax implications of what you choose.
Disability Insurance – Get 60% Of Your Income
Usually, up to 60% of your income can be insured because of disability insurance.
So what does this mean?
So as you are earning a pay check today, you are getting 100% of your income. However, 60%, if you were to become disabled, would become the maximum that you could receive.
This means we don’t want to buy insurance to incentivize us to become disabled. However, statistically speaking, it more likely you become disabled than die. This is why disability insurance is so important.
So, if I know I am limited to 60% of my income, now I need to think about the tax implications of how much I am receiving if I become disabled.
So in this example there are two ways. You can pick premiums with pre-tax money or post-tax money.
Pre-Tax Disability Insurance
So what this means is if I get my paycheck, I pay my premium with money I have not paid tax on. Now when I file a claim for disability insurance, I will pay taxes when I file a claim for disability insurance.
So, if I become disabled in the future I will pay taxes at that time.
Post-Tax Disability Insurance
Now, post tax. If you withheld taxes and pay the disability premium. Then if I file a claim. There will be no taxes at the time of the claim in the future.
Tax Level Affects Disability Insurance
Now here is something to think through when you are paying through your employer.
Let’s say you become disabled and your income is only 60% of what it would if you were working today.
What income tax level would you be in at that time versus today?
Will it be higher or will it be lower? It is important to think through and if pre-tax versus post-tax is more of a benefit to you.
Again, this is just a benefit that may be available to you through your employer. It can be costly to provide for yourself independently. So it is important to think for yourself whether you want to pay for it now or whether you want to skip it, but it is very important to consider.
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