COVERING DISABILITY

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.  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 protection 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.

Of course, the tax consequences of disability insurance must also be carefully evaluated.  For example, if the employer pays the premiums (including if you deduct such premiums from your own, closely-held corporation), 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. 

When it comes to disability insurance premiums, you may have heard us at Abo and Company even challenge the conventional wisdom of taking a legitimate tax deduction whenever you can. Frankly, disability insurance coverage can often be difficult to obtain in quality and amounts desired.  It is typically limited to 45-60% of your gross income should a sickness or illness prevent you from earning income in your occupation or job. Well, if you do become disabled, why would you want to dissipate such already reduced funds available by losing such to taxes, especially when you need all the money you can get your hands on? Can you and your family live on 40% or less of your normal income?

Another Abo concern?  Well, when, as accountants/advisors, we bring up the need for disability coverage we’re startled to learn how few have individual policies.  If they have any coverage at all, they usually rely exclusively on group policies provided by their employers.

A seasoned insurance professional can probably name many shortcomings for such a false sense of security  but we are very concerned just noting the current turmoil in the employment ranks, We’ve found it extremely rare to find a group policy you can take with you should you change employers (voluntarily or, considering today’s environment, terminated) or become self-employed. Most group disability contracts are not portable, and do not fall under COBRA regulations. Often when you leave the employer, you leave such policies behind, while we’ve witnessed many individuals attempting to purchase individual coverage at that point and finding it much more expensive, if available at all, due to age or health issues.

The rules governing disability insurance become extremely complicated and we recommend that professional advice be obtained both with the selection of suitable coverage and even maximizing tax benefits arising from a disability.  Speak to your insurance advisor today.  If you don’t have one or would like a “second opinion” in this important arena, ask us for the name or names of credible insurance professionals we have worked with.