Disability Insurance is usually ignored as part of an estate plan. This is a mistake. Estate planning is not just about what happens to your things when you die, it is also about preserving your assets from attack or loss. Protecting your assets and lifestyle if you become sick or injured should be part of an overall plan.
As an employer I have also deemed disability insurance for my staff an important benefit. My firm may have several offices, but we are still not big enough to pay an employee’s salary indefinitely should he or she become disabled and unable to work. Instead of letting the employee go without compensation, I instead have chosen to provide a group disability insurance policy that pays a disabled employee a portion of his or her salary. The cost of this policy is small, but if someone becomes disabled the benefits are huge.
Employees should also think about supplemental disability insurance that will replace lost compensation over and above employer provided insurance. A rider on the employer provided policy is inexpensive but should the worst happen, can prove a lifesaver.
There are many quality disability policies on the market but Northwestern Life issued the policy I provide my staff, so I asked Mike DeBellis, the Representative who services the policy, to write an article about supplemental disability for my clients. I hope you find the article useful and, if you have any questions, please feel free to contact Mike or myself.
Peter L. Klenk, Esq.
Law Offices of Peter L. Klenk
By Mike DeBellis
When it comes to insurance benefits that employees receive at work there is one in particular that is the least understood and probably the most important. That benefit is Group Long Term Disability Insurance (Group LTD). Of the 3 primary benefits that most people receive from their employer, Group Health, Group Life and Group LTD, the Group LTD is most often the least understood and is often more complex to understand. Most people do not take the time to read their benefits booklet in this area.
The first question that I ask clients in this area when they have LTD through an employer-sponsored plan is “who pays for the cost of the Group LTD”. If the employer pays 100% of the cost of the Group LTD benefit, then the benefit is subject to taxes at time of a disability claim. Most people are not aware of this at all. This is an IRS regulation. If the employee pays for 100% of the benefit, with after tax dollars through a payroll deduction, then the benefits are not subject to tax at all at time of claim. The over whelming majority of cases that I work on, the Group LTD is Employer paid and therefore the benefits are 100% taxable at time of a claim. This is a problem for most people since after taxes the 60% group benefit is only 40 – 45% of the gross income. In other words their gross income gets cut by more than half if they become disabled and are only relying on a Group LTD plan to protect their income.
There are a few situations where there is some type of cost sharing between the employer and the employee for this type of benefit. In cases like this the portion of the benefit that the employer is paying for would be subject to income taxes at time of claim. This type of arrangement is not very common.
Another item that often gets overlooked with Group LTD plans is that these plans max out at a monthly amount. For example if someone has a 60% Group LTD benefit and they make $150,000/year, they automatically think that they are protected at $90,000/year of benefits or $7,500 per month. However many plans have a monthly max such as $5,000 per month. Which simply means once and individual earns over $100,000, every dollar of income over $100,000 is totally exposed and not protected by their Group LTD plan. Some plans have a higher limit such as $7,500 or $10,000, but there is always a monthly max to take into account. The other item of significance is for people who work in sales who are compensated through a combination of base salary plus commission or bonus, is that many times Group LTD plans do not cover bonus or commission dollars at all. So this income may also be exposed and not protected.
Where I am able to help clients is to educate them on their Disability Income Gap. The gap is defined by what they normally take home each month after taxes and deductions, subtracted by what they would take home if they became disabled. My job is to work with them, reading their booklet and figuring out exactly what they would take home in the event of a disability. Many times this benefit that they would receive from their employer is subject to tax so we make an adjustment for taxes. We subtract this number from what they normally take home and that produces the Disability Income Gap. I then am able to use quality Individual Disability Insurance product to supplement this gap so in the event of a disability they are kept whole and are making very close to what they would normally take home while working. The individual products are portable and go with the employee if they change jobs occupations or become self-employed.
Michael J. DeBellis
Financial Representative
Northwestern Mutual Financial Network
1818 Market St.
Suite 3010
Philadelphia, PA 19103
http://www.nmfn.com/michaeldebellis
215-981-1878 (direct)
215-893-8525 (fax)
