Employees love when employers give them a raise, provide unique employee benefits, or pay for perks. The more that your employer pays for, the better, right? No...not necessarily. There is an expense that is more beneficial for you to pay for yourself.
In the beginning of my financial planning career, I remember my employer telling me that I would be able to pay my own premium for disability insurance. Before understanding the financial benefit of this, I thought, “Oh great, I get to pay for it myself, thanks?”
So why is paying your own disability insurance premium so great after all? It has to do with taxes.
If you pay your own premium for group disability coverage, any disability insurance payouts you receive will be tax-free. However, if your employer pays the premium for you it will be deducted as a business expense for them and any benefits you receive if you become disabled will be taxable. If the income is taxable, it won’t be nearly as valuable as tax-free income would be. The expense of the premium payment is well worth the reward of tax-free benefits if you ever become disabled.
Can you always pay your own premiums? Well, no. Many employees aren’t given the option to pay their own premium but you never know if you have the option unless you ask. In the least, it’s good to understand how the benefit will be paid if you become disabled. If you are expecting that income to be tax-free and it’s actually taxable, it could change your situation drastically. Of course, the impact will vary depending on your other taxable income sources.
Group disability insurance can often be much less expensive than private coverage. If your company offers it, you will usually have the option to opt-in for this coverage during open enrollment (which is typically in the Fall). Because the premiums for group coverage are much lower and don’t require medical underwriting, I often recommend getting as much group coverage as possible. However, there are some advantages to paying more for private coverage and in some situations it makes sense. One benefit of having a private disability policy is that you are always paying your own premium, making the benefit tax-free. Whether you should consider private disability insurance (sometimes instead of or in addition to group coverage) depends on several factors and that’s something we can assess for our clients.
At Autumn Financial Advisors, LLC, we do not sell insurance or benefit in any way from you purchasing insurance. If we recommend insurance, it is because it is our unbiased opinion. If we think you need additional coverage, we will help to put you in contact with the right individuals/companies to run quotes and find the best coverage for you.
Do you have group disability insurance now? If so, are you paying the premiums? If not, do you have the option to? In this case, it’s something you should be asking your employer to please let you pay for.
