ABO AND COMPANY ON DISABILITY INSURANCE - GET IT!

Disability is a far greater risk for a younger person than dying. Yet, more people have ample life insurance in place than disability insurance. Essentially, this insurance is protection against loss of income and the cost ranges from about 2% to 4% of annual income for women and 2% to 3% of income for men depending upon age. Some of the more unique uses of this type of insurance might be:

• In conjunction with a buy/sell agreement that is triggered by death or disability.
• As overhead projection for a small business owner who may be required to pay workers’ salaries
  while the owner is temporarily disabled.
• To protect the seller of a business in the event the buyer becomes disabled before the completion
  of installment payments to the former owner.

People who consider the use of disability insurance for these purposes as well as for obtaining income during a protracted period need to focus on:

• Definitions of illness and disability used in the policy which can affect coverage.
• Guarantees as to non-cancellability of the policy and basis for premium increases.
• Length of the benefit period that is desirable.
• Provisions for cost-of-living increases in benefits, and how they are measured.

Critical to your evaluation of disability coverage through an employer is its portability. A disability policy is portable for you as an employee if you are able to take it with you if you change jobs or places of employment. Why is a portable disability policy so important? Because it continues to provide disability coverage wherever you go. Even before the economic upheaval worrying so many of us today, the chances that you will stay at your current place of employment forever are slim. You may find that your needs are better met at a different company, you may be offered a better salary elsewhere, or your employer may just close its doors or downsize you out of a job. Regardless, that non-portable disability insurance policy will not be going with you. A portable disability insurance policy is transferable, and continues to provide protection if you change jobs or companies. Without a portable policy, you could be left without protection when you need it. Many choose to obtain employer-provided disability insurance which can be a good idea but consider providing yourself with a cushion by purchasing an additional disability policy on your own. Individual coverage may be more expensive, but a portable policy provides added coverage, particularly if you do not feel you will stay with your current company forever.

Of course, the tax consequences of disability insurance must also be carefully evaluated. For example, if the employer pays the premiums, benefits are taxed to the covered individual. Conversely, if the employee pays the premiums, benefits received avoid tax. However, disabled persons may still deduct medical expenses incurred in conjunction with their disability to the extent these exceed 7.5% of adjusted gross income, and may also include the cost of home improvements that enhance a disabled person’s quality of life, such as the construction of ramps for a wheel chair bound individual. The rules governing disability insurance become extremely complicated and we recommend that professional advice be obtained both with the selection of suitable coverage with maximizing tax benefits arising from a disability.