Group Disability Insurance - Benefits and Income Tax Implications
The employer and insurer determine the monthly income replacement percentage based upon what the employee earned prior to the onset of disability. Short-term policies may replace anywhere from 50% to 100%; long-term policies often replace 60% of income. Plans typically require that the employee satisfy an elimination period. It is the period of time for which benefits are NOT paid after you file a claim. The elimination period begins the day after your last day worked (LDW) and stops on the last day indicated in your policy. This means if your plan has a 90 day elimination period, benefits would begin on the 91st day after your last day worked.
Income Tax Implications
Benefits that a disabled employee receives are tax-exempt for that portion of the premium that the employee pays and taxable for that portion of the benefit that the employer pays. Taxable may be defined as being subject to federal and state income and FICA tax.
Conversion to Individual Plan
Group disability policies are usually neither portable nor convertible when one leaves one's employer.
Integration with Other Income
Benefits may be offset by any payable under social security, worker's compensation or coverage from another disability in force. Examples of other sources of income that would not be used to offset benefits payable under a group policy are:
- 401(k) plans
- profit sharing plans
- thrift plans
- tax sheltered annuities
- stock ownership plans
- non-qualified plans of deferred compensation
- pension plans for partners
- military pension and disability income plans
- credit disability insurance
- franchise disability income plans
- a retirement plan from another Employer
- individual retirements accounts (IRAs)
- individual disability income plans
- salary continuation or accumulated sick leave plans.
Analysis and Application
A financial planner is of value to the client who may well need assistance in navigating the rules of a group plan to determine eligibility, extent and duration of coverage, taxability of benefits and the submission of a claim.
Group disability insurance is a critical piece of any benefit package, yet not offered sufficiently by employers. Many of the provisions that apply to individual plans in terms of definition of disability, benefit provisions and length of benefit period apply to group plans equally. Different are the simplified underwriting requirements and lower cost afforded participants under group arrangements. Planners and their clients would do well to understand how these policies work and how to benefit from them.
Mutual Funds & ETFsFind out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
Mutual Funds & ETFsFind out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
Options & FuturesUsing iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
Mutual Funds & ETFsFind out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
Mutual Funds & ETFsLearn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
Mutual Funds & ETFsExplore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
SavingsWomen's risk aversion, penchant for research – and lack of male-style "irrational exuberance" – means their investing strategies often put them ahead.
Investing BasicsRisk-adjusted return is a measurement of risk for an investment or portfolio.
Investing BasicsBuying below the margin of safety minimizes the risk to the investor.
Mutual Funds & ETFsFind out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
The amount of risk that an insurance company retains after subtracting ...
Coverage that provides financial protection to investors, financial ...
The maximum loss from a peak to a trough of a portfolio, before ...
The absolute level of a fund's investments.
A technique used by insurance companies to calculate loss reserves.
The financial benefit that a risk-taking activity will bring ...
The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
An investor who is overweight in a particular sector risks a loss in value for the portfolio if there is a downturn in that ... Read Full Answer >>
The retail sector consists of companies operating in multiple industries such as specialty retail, general retail, food and ... Read Full Answer >>
Like all equity investments, insurance companies present investors with market risk. Insurance companies, like banks, also ... Read Full Answer >>