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Long-Term Disability Insurance: Don’t Overlook This Employee Benefit
Fall is in the air and the season of pumpkin spiced coffee drinks, professional football and holiday planning is upon us. This is also the return of another far less exciting annual event: open enrollment for group benefits coverage! If you’re like me, you dutifully complete your benefits elections to ensure your coverage is appropriate when the new year starts. And, if you’re like me, you’ve also always wondered whether it makes sense to continue opting in for certain benefits you may possibly never need. One such benefit is Long-Term Disability (LTD) insurance.
What is Long-Term Disability Insurance?
Long-Term Disability provides protection against lost earnings during extended periods of disability. Benefits are generally capped at 60% or 70% of gross monthly earnings and policies include an elimination period ranging from 30 days to two years (the average is 90 days). You would first have to be unable to work for that initial period of time before any benefits kick in. The longer the elimination period, the cheaper the policy cost. The length of the benefit period for LTD policies can range from two years to even longer. Finally, LTD policies differ from Short-Term Disability policies, which generally have shorter elimination periods, provide coverage up to 80% of gross income, and benefits usually only last 3-6 months.
Who Should Pay the Premiums – Employee or Employer?
Whether the employee or the employer pays the premiums of a LTD policy makes an enormous impact on the tax treatment of any benefits received. Therefore, it is incredibly important to understand the implications of allowing an employer to cover this cost. While receiving LTD benefits, 60% or 70% of gross monthly income should be sufficient if those funds are free of federal taxes (you would still be subject to state income tax on any monies received). If, instead, the benefit is fully taxable, then the net after-tax value of the monthly benefit likely becomes insufficient to cover your regular living expenses. The good news is that as long as you, the employee, pays for the LTD premiums out of pocket, with after-tax dollars, then any benefit received is free of federal taxes. Just remember, if your employer automatically covers the cost as a tax-free fringe benefit, then any benefits received are fully taxable to you.
Long-Term Disability is often overlooked during the benefits enrollment period, but it is worth taking an extra few minutes to review the benefit details. Protect yourself and your loved ones against a loss of income due to disability by enrolling in LTD coverage, and be sure to pay for the premiums out of your paycheck with after-tax dollars. If that is not an option, you may want to look into Supplemental LTD coverage to fill the income gap that could arise from employer-sponsored group coverage. Talk with your Sand Hill Wealth Manager if you have questions about LTD or think you may need Supplemental LTD coverage, especially if your employer does not offer LTD as a benefit. Then sleep peacefully at night knowing you’ve taken further steps to protect those you care for.
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