This article shows what you lose if your disability insurance is taxable.
Say you earn $300K and have a group policy at work that covers 60% of gross income up to $15K/month. Your max benefit is $180K/year ($15K x 12 months).
Taking a 40% pay cut if you become disabled isn’t too appealing. It’s even worse if your disability insurance is taxable.
Tax-Free
If the $180K/year is tax-free, you keep all $180K.
Taxable
If the $180K/year is taxable, you keep only $144K, assuming a 20% effective tax rate. $180K – 20% ($36K) = $144K.
That’s a lot to lose if your disability insurance is taxable!
$144K/year is still a lot compared to the average American, but it may require you to make lifestyle adjustments, especially if you have student loans, you’re behind in saving for retirement, or you’ve been living above your means. Hopefully you really want your disability insurance to be tax-free!
If you need help setting up your disability coverage to be tax-free, or are interested in working with a fee-only, fiduciary advisor, feel free to schedule a FREE Financial Pulse Assessment™. This is a free 3 step process to get clarity on your finances and “test drive” our services.
