Have you considered how you will cover your expenses if you become incapable of working due to an illness or disability? While most businesses offer some sort of plan to cover your paycheck for a few weeks, a long-term disability could leave your assets exposed. With most Americans scraping by with not enough savings, losing your paycheck could be financially disasterous.
You may have a group long-term disability (LTD) plan through your business or your employer, but what most people don’t realize is that most plans typically only replace 60% of income, and the payments are taxable at claim time. To further complicate the situation, group long-term disability plans are usually subject to income limits, most commonly a $5,000 to $10,000 monthly benefit maximum.
Let’s take a look at Bob Smith. Mr. Smith is a highly paid executive who earns $500,000 a year. He has a group long-term disability plan that covers 60% of his income up to a maximum of $10,000 a month, and it’s taxable at claim time.
$500,000 a year X 60% = $25,000 a month. But because Bob’s policy only pays a maximum of $10,000 per month, this is the amount he will receive.
This means that in reality, Bob only receives 23.3% of his taxable income due to the group policy limitations—and that’s before taxes are deducted.
If your group long-term disability plan will not meet your monthly needs in the event of a disability, it is important to layer a supplemental individual disability policy that offers benefits of up to 80% of your monthly income on top of your group long-term disability plan. This kind of coverage can provide an enormous benefit and relief to you and your family. Let’s look at Bob’s situation again, assuming a total payout of 80% of pre-tax income:
Group long-term disability alone:
$500,000 annual income = $10,000 a month taxable benefit through the group long-term disability policy.
With a supplemental individual disability policy layered on top:
$500,000 annual income = $10,000 monthly taxable income through group LTD
To get to 80% of pre-tax income, add another ~$23,333 of monthly taxable benefit from supplemental coverage.
Many business owners and professionals who suffer from long-term illnesses or disabilities are able to avoid financial devastation thanks to adequate replacement income.
No one ever thinks they will become disabled. That’s something that will happen to someone else. But that someone else is thinking the same thing, and sooner or later your number may come up. It doesn’t make sense to leave your most valuable asset – your ability to earn a living – exposed.