Disability insurance planning is an often overlooked aspect of your life. Are you guilty of assuming that "you have it at work"?
There are two major types of disability insurance available to employees; group long term disability (LTD) insurance, and individual disability insurance. A group long term disability insurance plan typically is designed to replace 60% of base salary to a monthly maximum spelled out in the policy. A majority of group LTD plans on the market typically cover 60% of base salary to a maximum of $5,000 a month. Notice that bonus income, as well as commission income is often not covered.
Group long term disability insurance is taxable to an employee who goes on claim assuming the employer was paying the premiums for the coverage. The only way to make up the lost taxes during a claim is to have purchased an individual supplemental disability insurance policy that layers on top of your group coverage before the claim ever happened. Having both group long term disability, and an individual disability insurance policy allows you to have the maximum income replacement available during a disability insurance claim. It also gives you the power to know that if your employer ever dropped the coverage, or you ever left your current position, that you would still have your own disability insurance. You can also have the ability to convert a large percentage of your group LTD into your supplemental disability insurance plan when you leave your current employer.
Many people earning an income over $100,000 a year are severely underinsured when it comes to group long term disability insurance. Since the monthly maximum is usually around $5,000 a month, any income over $100,000 a year should be insured with individual disability insurance layered on top of the group plan.
Shortfalls of Group Long Term Disability Insurance
Benefits are taxable if your employer pays the premium
More restrictive definitions within the policy
Many have a 2 year maximum on drug, alcohol, mental and nervous disabilities
No rate guarantees
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