Paying your physician disability insurance premiums with pretax income may be an attractive option due to the immediate savings you receive. But are you really saving money in the long-run? In this two-part post we’ll explain whether pretax or post-tax dollars provide a greater benefit.
Do You Have Enough Disability Insurance?
Anyone who works for a living should have long term disability coverage. Typically, coverage maxes out at about 60% or 70% of gross (pretax) earnings. This is enough to let you plan for mortgage payments and keep the refrigerator stocked. But, if like many people, you get physician’s disability coverage as part of your benefits package at work, watch out. Nine times out of ten, if you are currently covered by a Group Disability Policy, your practice will pay your physician disability insurance policy with pretax dollars. This means your benefit payouts will be taxed as income and you will likely receive considerably less than you had planned for. Your payouts will be reduced by a third or so (depending on your tax bracket), cutting the benefit to about 40% of your pretax salary, rather than the 60% – 70% you expected.
To give an example, if you are making 100K, your disability policy will likely cover about 65% of your salary, or 65K (if this isn’t the case for you, it’s time to update your disability policy!). If this is payed with pretax dollars, your benefit will drop to about 44K after taxes. So instead of 65% coverage, you are really looking at 44K, over a twenty thousand dollar drop in income. That could leave the fridge pretty bare. The same scenario applies for any disability insurance for which you pay using pretax dollars.
The other side of the coin is paying for your disability insurance with post-tax income. If the coverage is paid by you personally, you won’t be taxed on the benefits. The same holds true if you pay with after tax dollars through payroll deduction. Contact us for further explanation.
What to Do?
Once you realize you don’t have enough coverage, it’s time to review your policy. We perform a thorough analysis to determine your max potential benefit depending on your current disability policy portfolio. Let’s say you are maxed out at your highest potential benefit with your disability policy. If that benefit, or even a portion of that benefit is pretax, we can supplement your group coverage with individual, non-cancelable disability coverage at an affordable discounted price. There are also a number of other reasons why you would benefit from a simple disability insurance policy review, but for the purposes of this article, I will stay within the topic of taxes and real disability insurance benefits.
Stay tuned for our next post where we will provide a detailed example. Feel free to contact us in the meantime if you would like us to review your situation.