If you ask people the question, “What is your greatest asset?” you will get a range of answers. Many will say that it is their house, others will boast that their 401k is the biggest, and still others will jokingly say that their life insurance will pay out a million dollars, but only if they’re dead. Almost everyone will miss the true answer: your earning ability. Over the next few decades, you have the potential to earn millions of dollars. But that ability disappears if you are hurt, injured, or suffer an illness that leaves you unable to work. Disability insurance can help you offset that risk, but you should understand how it works, and what the tax implications are.
What is Disability Insurance?
There are big misconceptions about what disability insurance is, and what it can do for you. Here are a few of the biggest ones:
- Major Disabilities – Disability insurance covers all disabilities. If you cannot perform the duties of your job, then you are disabled. You don’t have to be paralyzed or comatose. There are a number of people out there that have lower back injuries and prevent them from sitting for long periods at a time: they are disabled even though they can still go rock climbing. A painter that fractures his wrist could still do a lot, but is disabled. The policy will dictate own occupation or any occupation.
- On the Job – Disability insurance is not workers compensation insurance. If you are injured on the job, or off the job, a disability policy will provide an income if you cannot work (assuming you meet the requirements, for instance you can’t become disabled because you were committing a felony).
- Employer Coverage – Most people mistakenly assume they have coverage through work. While some do, many do not. And even if a person has disability insurance through their job, that policy will often only cover 60% of their income; and the benefit received is subject to taxes.
Taxation of Disability Insurance
Disability insurance is taxed differently depending on who owns the policy. Figuring it out is not too difficult, but in the event of an oddly worded policy, you may need the help of an accountant in Billings, Montana to do so.
- Employer Provided Policies – A disability policy that you get as a benefit of your job is almost always taxable. Look at it this way: do you pay for the policy? If not, then it is most likely a taxable benefit. These benefits pay about 60% of your salary, so after taxes that could be less 50%.
- Personal Disability Insurance – A disability policy that you took out, and you pay the premiums on it, is most likely not taxable. You have paid taxes on the money going into the policy, so the money coming out of the policy is not taxed. There can be some situations where this is not the case, so A+ Accounting & Consulting can help you figure that out.
Protecting Yourself with Disability Insurance
If you are working, even if you are not supporting a family, you should have disability insurance. This coverage will protect you in case you cannot work and cannot provide an income any longer. Seek out a financial professional to get a quote on what it will cost to protect your greatest asset; if it is too much then get enough coverage to at least pay for your rent or mortgage. If you need help determining whether or not your policy will be taxable, then you should talk an expert at Practical Taxes. We knows about taxation of disability insurance, tax preparation, business planning, online payroll, and a whole lot more.