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Disability insurance replaces a percentage of your income if you suffer a covered illness or injury that leaves you unable to work. If your employer includes disability in your insurance package as an employee benefit, your employer may pay a portion or all of the premium. Two types of disability coverage are offered.
After signing up for group disability through your employer, all or a portion of the premium is deducted from your paycheck each cycle. Your benefits stop when you leave your job, unless your policy includes a portability option, which allows you to take your coverage with you when switching employers.
To begin receiving disability payments:
If you pay your premium in-full with post-tax dollars, you don’t have to pay taxes on your disability income.
If your employer pays part of your premium and you pay the rest with post-tax dollars, you only have to pay taxes on the portion of your disability payments equal to the percentage your employer paid. For example, if you and your employer split the premium 50/50, you pay taxes on 50% of your disability benefits.
If your employer pays 100% of your premiums, or if you pay your premiums with pre-tax dollars, then your full disability benefit payment is taxable as income.
Whether you’re planning to have a baby or want to have income protection for an unexpected injury or illness, group disability insurance is usually worth it. Group disability premiums can be as low as $5 to $10 per paycheck and are often subsidized by your employer. In exchange, you get peace of mind knowing that if something happens to you, you’ll still have a portion of your paycheck, usually 60% or more, depending on the policy.
If you’re set on income replacement, your main alternative to a group disability plan is an individual plan. Your coverage stays with you for as long as you pay your premiums, regardless of employment. And, you’ll be able to customize the key elements of your policy, such as the length of your waiting period and the percentage of your income replaced.
However, you could also rely on:
SSDI benefits don’t kick in until you’ve been out of work for at least six months, which means you’ll be receiving long-term disability payments while you wait for your SSDI benefits to start.
Your long-term disability plan usually includes a set amount of time it will pay benefits before offsetting with other payments you may be receiving, such as workers comp or SSDI. This time period is typically six to 12 months. Once this time passes, your long-term disability will pay you the difference between your Social Security payment and your long-term disability payment.
For example, if you get $2000 per month from your long-term disability policy and get $1,500 a month from Social Security, you’ll only get $500 a month from your disability policy insurer after offsets.
A group disability insurance plan is one of the most affordable ways to protect your income if you’re unable to work after a disability. And if your employer subsidizes the cost of your premiums, you may even get coverage for free. But you’ll have no say in how the policy is crafted or which add-ons your policy includes.
To consider an individual policy or a way to subsidize what your employer offers, shop around to find the coverage that suits you best.
And three tips for how you can get started yourself.
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