Fw: $CFS - LTD and tax considerations (US)
- Something I thot might be of interest to you States people on disability... Alley
----- Original Message -----
Sent: Sunday, November 23, 2003 2:50 PM
Subject: $CFS - LTD and tax considerations
This article was originally posted on the listserv for The Northern Virginia CFS/FM Support Group. It contains good information on what to expect from your disablity insurance when you become disabled. This is the information I wish I had had before I had purchased Long Term Disability Insurance (LTD) and Supplemental Long Term Disability Insurance (SLTD).
If your insurance premiums were:
100% Contributed by the Employer - you pay taxes on the benefit
100% Contributed by the Employee - you pay no taxes on the benifit
Pretax dollars - changes everything
If you wish to be on the email list for this the Northern Virgina SG, see the end of the email. Purrrrrrrrrr
Remember Uncle Sam's Disability Cut
By Michelle Singletary
Sunday, November 9, 2003; Page F01
It's open enrollment time, and that means figuring out which health and other insurance benefits you want to buy through your employer.
As you weigh your options, please make sure to consider getting long-term disability insurance. And if you do get it, make sure you understand how much coverage you have and what the tax implications are.
For example, my financial planner recently asked me if I wanted to supplement the disability insurance I have through my employer.
"Why on earth would I want to do that?" I asked her. "I've got a good policy."
"Did you consider that your disability benefits would be taxed?" she asked.
I thought I had.
Generally, if your disability insurance premiums are paid entirely by your employer, your benefits, if you ever receive disability pay, will be taxable income. If you split the cost of the premiums with your employer -- 50-50, say -- then half of the benefits you receive will be considered taxable. If you pay the entire cost yourself, the benefits will not be taxed.
What I didn't realize is that if you pay for your coverage with pretax dollars -- that is, your income is reduced by the cost of the premium before withholding tax is calculated -- those premiums are considered to have been paid by your employer.
That means the benefits are fully taxable.
And that means you could end up with a lot less money for paying your monthly bills than you expected. "That's why people have to really understand what they have when they get disability insurance," said Todd Katz, a vice president for MetLife.
"Many people have a false sense of what their group plan offers, and it may not be all that they need."
Under my employer's plan, I elected disability coverage that would pay me 70 percent of what I currently earn up to a certain maximum benefit.
But because I now pay for my disability coverage with pretax dollars, the IRS is going to take a cut of that already reduced pay if I ever need those benefits. As a result, I may need to get additional disability coverage.
Buying individual insurance isn't cheap. Of course, the amount you pay can vary greatly. However, Katz said, if you are a 35-year-old female, for every $1,000 in monthly benefits, you might expect to pay $50 per month in an individual plan.
Based on that pricing, let's say you realized that your disability plan at work would pay you $2,000 a month after taxes. But you need a total of $4,000 to cover all your living expenses. If you bought an individual plan that paid you a nontaxable $2,000 a month, your premium could amount to $1,200 a year.
When considering an individual policy, you have two options. You can go on the open market and purchase additional coverage, or you can contact the insurer for your group plan at work.
"Many employers offer their employees an opportunity to buy additional disability benefits," Katz said. "And there are benefits of doing it that way. You may be able to pay for it through payroll deduction. You may get a group rate and there may be no, or a limited, requirement for an insurance exam."
Katz suggests you consider the following when evaluating the adequacy of the disability coverage through your group plan at work:
• What percentage of income is being replaced? Does your benefit cover income from bonuses or commissions? Typically, disability plans cover only base salary, Katz said. Keep in mind that if you become disabled, your work-related expenses may decrease, but such things as medical expenses may rise. Other monthly expenses, such as food, utilities, and rent or mortgage, will still need to be met.
• How long will it take for benefits to begin? Most long-term disability plans have a waiting period before benefits are paid. So it could be 60 days or six months before benefits kick in.
• How does your plan at work define a disability? Is it your inability to perform your current job, or any job?
• Don't forget to consider other assistance you may be entitled to receive, such as workers' compensation. You could become eligible for Social Security Disability Insurance. However, Social Security has a strict definition of disability, and your disability must be expected to last for at least one year or to result in death.
Consider this: U.S. workers have a 1-in-3 chance of becoming disabled for at least 90 days, according to the Hartford Financial Services Group.
I can't say that I was thrilled that my financial planner pushed me to look at my disability coverage, but you had better believe that if I ever do become disabled, I'm sending her a thank-you note.
Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online atwww.npr.org. Readers can write to her in care of The Washington Post, 1150 15th St. NW, Washington, D.C. 20071 or by e-mail atsingletarym@....
© 2003 The Washington Post Company
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