Supplemental disability insurance provides professionals who are insured under a group disability insurance program the opportunity to enhance and optimize their income protection. Contrary to what most people believe, group disability insurance at work is less comprehensive and does not always provide an adequate amount of coverage. In some cases it may severely limit your income protection, especially for higher income earners.
What is Supplemental Disability Insurance
Simply put, supplemental disability insurance is an individual long-term disability insurance policy designed to provide for the gaps and limitations that exist in group disability coverage. It is the same type of policy used for professionals who do not have any group coverage the primary difference is in the amount of benefit that can be purchased. To review the benefit amounts available to you, call 800-817-4522 or request a disability insurance quote today.
Taxation of Group Disability Insurance Benefits
If your employer provides and pays for your group disability insurance, you may be underinsured due to the taxation of benefits that occurs. Since the insurance is paid for by your employer, benefits are considered ordinary income and taxed as such, causing a considerable reduction in benefits. Consider the following example:
- A professional earning $100,000, who is provided group disability insurance by his employer with a 60% of income benefit would expect $60,000 per claim year.
- Assuming a 22% tax bracket however, this person would actually only receive $46,800 each year, after taxes (approximately 47%, not 60%).
Group Disability Insurance May Limit Your Income Protection
For higher income earners, benefit caps may severely limit the income protection provided by group coverage in comparison to that available on an individual basis. Most group policies will provide benefits equal to a percentage of income (such as 60%), up to a specified maximum (such as $5,000/month), which can create benefit limitations for certain income levels. Consider the following example:
- A professional earning $200,000, is provided group disability insurance of 60% to a maximum of $5,000/ month.
- This person should have $10,000/ month of benefit (60% of $200,000), but due to the plan maximum, is only provided $5,000. Supplemental disability insurance can provide the additional $5,000 monthly benefit needed.
Why Purchase Supplemental Disability Insurance
A persons ability to work and earn income is the very thing that allows him/her to provide for a family, accumulate retirement assets and maintain a certain quality of life. Although group disability insurance provides a basic level of coverage, it may not adequately protect you, your family, future or quality of life. Supplemental disability insurance provides you with additional income protection, portability (personally owned), and a higher quality coverage.
All scenarios and names mentioned herein are purely fictional and have been created solely for training purposes. Any resemblance to existing situations, persons or fictional characters is coincidental. The information presented should not be used as the basis for any specific advice.