Author Topic: Short Term and Long term disability insurance  (Read 2270 times)

BackNColo

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Short Term and Long term disability insurance
« on: December 20, 2016, 08:08:57 PM »
Help!

My HR announced that I can opt in/out of paying taxes on my ST/LT disability insurance. If I opt to pay the taxes, should I need the insurance the benefits will be tax free. If I don't pay the taxes and need the benefits, I will pay taxes on the insurance payout. 

The cost for both STD and LTD runs $415 a year. We are 1-2 years from FI and ~45 years old. My SO is about the same.

Thanks!
BackNColo

biglawinvestor

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Re: Short Term and Long term disability insurance
« Reply #1 on: December 21, 2016, 04:44:18 AM »
It's really a question of what you need from your disability insurance. Once you've calculated how much you need each year if you become totally disabled, you'll want to make sure your coverage provides that amount. It's up to you if the amount they're providing today is sufficient on a no-tax basis (in which case you'd want to pay the taxes on the premium today) or on a taxable basis (in which case you can skip paying the taxes today).

SeattleCPA

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Re: Short Term and Long term disability insurance
« Reply #2 on: December 21, 2016, 07:32:24 AM »
I always think it's a good idea to pay the taxes yourself and so have the benefit of tax-free income should the worst case scenario occur.


terran

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Re: Short Term and Long term disability insurance
« Reply #3 on: December 21, 2016, 07:36:51 AM »
Does anyone know if this is fairly universal? That is, if your STD/LTD payments are taken out before income reported on your w2 they'll be taxed if paid and if they're taken out after income reported on your w2 they won't be taxed? And I assume if your employer pays for them as a benefit then they will be taxed if paid?

BackNColo

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Re: Short Term and Long term disability insurance
« Reply #4 on: December 21, 2016, 07:56:03 AM »
Does anyone know if this is fairly universal? That is, if your STD/LTD payments are taken out before income reported on your w2 they'll be taxed if paid and if they're taken out after income reported on your w2 they won't be taxed? And I assume if your employer pays for them as a benefit then they will be taxed if paid?

According to my HR department, the option is universal, but most HR departments don't want to bother with the paperwork so the company just pays the taxes. Our CFO decided to give everyone the option.

Thank you all for the information and opinions.


Drifterrider

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Re: Short Term and Long term disability insurance
« Reply #5 on: December 21, 2016, 08:45:13 AM »
I'm giving you information only.

Per the federal tax code (US).  If your company pays for your coverage, it is taxable to you upon receipt as ordinary income.

If you pay for your coverage, it is not taxable (it is an insurance payout) and the cost of the premium is not deductible either.

Why would you want to pay taxes now on something you might never receive?

Read the policy CAREFULLY.  Look for the claw back provision and look for the Social Security Administration determination of disability.

My brother had ST and LT through his company.  Company paid for ST.  ST coverage is usually six months or less.  The payout was taxable to him as ordinary income (ST Only).

He paid the LT coverage.  The payout was NOT taxable to him.  BUT there were two stand out provisions:

1.  If the Social Security Administration deemed he was NOT eligible for long term disability, his private policy would NOT pay.

2.  For every dollar received from SSA, his policy would "claw back" one dollar.  He had been paying for $3,000 per month coverage but because SSA paid him $1,700, his private policy only covered the additional $1,300.  So he was paying a premium based on $3,000 to only receive $1,300.

Caveat Emptor.