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Why do Disability Companies cap benefits available at 60% (or Less)?

Dean A. Schachter

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People always ask why they can't get 100% of their pre-disability income as a benefit.

There are several reasons but the most important are:

(1) Taxes lower your  current income, somewhere between 25% to 40%. Comparing that to a disability benefit that is 60% of your gross income. The amount you receive is almost the same.
Say you receive a monthly income of $10,000 taxes at 40% you actually receive $6,000 after taxes.
When you apply for a disability policy and the company pays you 60% of your $10,000 income the monthly benefit is the Same! $6,000.
So you really are getting 100% of income!

(2) Returning to work:
Companies who pay claims hope you can return to work ASAP. If they paid out 100% of Pre-Tax income there is a disincentive to return to work. If your policy pays less than 60% of income there is more motivation to return to work.

Taxation of Disability Insurance Benefits

Dean A. Schachter

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Many people want to claim their Disability Insurance Premiums as tax deductible. This is NOT always a good idea.

Group Disability Insurance
The premium is always taken as a deduction by the employer. In this case, the benefits are taxable as ordinary income. No way to avoid this. Think of the benefits as taxable income from your employer.

Individual disability Insurance
Taking a tax deduction on the premiums is NOT a good idea. While you could save a few dollars on your taxes by deducting the premiums, the benefits will be taxes as ordinary income. 
Example: think about suffering a disability and need your disability benefits, the last thing you want is to pay taxes on those benefits. Taxes could reduce your benefits by 25% to 35%. If that happens you will have much less than the 60% of income you wanted and most certainly will need. The tax deduction will seem foolish and unnecessary when you need all of your disability benefits.

Discounts on Disability Insurance Policies

Dean A. Schachter

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Most disability companies have discounts for the following:

-Couples Discounts when a couple purchases a policy at the same time.
-Business Discounts are available for groups for 2+ employees who work together.
-Combination discounts are available when a client purchases an individual policy AND a Buy-Sell or Overhead Disability policy.
-Good health discounts for those in excellent health with NO adverse family medical history of Cancer, heart disease, stroke, etc. Guardian offers a 5% preferred health discount.

Not all companies offer all discounts.

The Presumptive Total Disability Clause in a Disability Policy

Dean A. Schachter

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The best disability policies have a clause called Presumptive Total Disability. The wording states that if a disability is due to certain illnesses or conditions the total disability MUST be paid. These include:

-Loss of Hearing
-Loss of Speech
-Loss to sight
-Loss of use to any two limbs (NOT necessarily loss of those two limbs but loss of use of those limbs)
-Cognitive impairment

This clause is actually a great protection for the insured as it eliminates any doubt as to whether a claim should be paid and offers the insured peace of mind.

Posted by: Dean Schachter

Professionals should have the Catastrophic (CAT) Rider on a Disability Policy

Dean A. Schachter

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Most companies offer a rider that adds an additional disability benefit if the disability is of a certain type.

The types of claims that fall under the Catastrophic rider include:
-Cognitive Impairment
-Loss of Sight
-Loss of hearing
-Loss of Speech
-Loss of use of any two limbs (not necessarily loss of the limbs but loss of use).
-Inability to perform 2 or 3 activities of daily living, similar to a Long Term Care policy, such as:

How much is the additional coverage and what is the Monthly Benefit?
The premium per thousand of disability benefits is much LESS on a CAT than the base monthly benefit.
So let's say you have a $10,000 per month benefit and would like $3,000 additional on the CAT rider. The additional cost is relatively small.

When is it advantageous to purchase a CAT Rider?
The best use of the CAT rider is when you have already maximized your basic monthly benefit but would like MORE coverage. Then, the CAT rider is advantageous.
Posted by:  Dean Schachter