Taxation of Disability Benefits
When you purchase a personal disability policy, the benefit payments are structured to be income tax-free. Consequently, you may not be eligible for coverage that equals your current salary since your take home pay is always less.
If your employer paid for your coverage, then the income you receive generally will be taxable. If you paid for a portion of the employer-provided coverage, then the pro rata amount of the benefits you receive are structured to be tax-free.
Choices, Choices, Choices
Consider the waiting period before disability payments begin. A longer waiting period saves you money, but it also means that you may have to live off your savings for a longer period. You are the best judge of how much of this risk you are comfortable assuming.
You also may want to coordinate the waiting period with any short-term disability benefits you could have. For example, if your short-term disability covers you for 90 days, look to have at least a 90-day waiting period so that you can potentially lower the cost on the long-term policy.
Ask how a policy defines an inability to work. Some policies will say “the inability to do any job or task”; others will say “own occupation.” You may prefer the latter definition so you’re not forced to perform some less-skilled, lower-paid work. That type of work may not help you meet your bills.