If you are filing a claim for LTD benefits, you need to know there may be some hidden costs with group disability claims. Specifically, (1) if your income includes a base salary plus bonus income, the bonus income may not be covered, and (2) you may have to pay taxes on your benefits.
As explained in the video above, most group disability policies pay a percentage of the salary you were earning before you became disabled. If you are awarded disability benefits, this “salary percentage” provision can work to your advantage.
The provision ensures that you would collect a percentage of your former monthly salary, usually in the range of 60 – 80% of your pre-disability income.
This policy language protects you. The insurer cannot deny disability benefits by saying you are able to work at any occupation for wages that would be far lower than your former salary.
But to stay ahead of the game, you must also watch for policy language that can hurt you, financially speaking.
Obscure terms and gaps in information are common with group disability insurance policies. Unclear policy language and provisions can greatly reduce your post-disability income.
Hidden Costs in Group Disability Claims: Bonus Pay
What if your annual salary is a combination of base salary and bonuses and/or commissions? Are you covered for 60-80% of your combined base salary plus the yearly bonus?
In many cases, the answer is No. This is why it is critical to read through your entire policy, and ask the questions that will help you realize just what your policy may or may not cover.
For example: Tom is a sales manager for a medical device company, making $170,000 per year. His income includes a base salary of $100,000 and a bonus of $70,000. He suffers a spinal cord injury and files a long term disability claim. Tom’s policy states that insurance covers “60 percent income replacement to a maximum of $10,000 per month.”
That would mean Tom’s combined income is protected and benefits would be $102,000 a year, or $8,500 a month ($170,000 x 60% divided by 12 months.)
Right? In most cases, no.
What Tom’s policy might not make clear is that only base salary is covered under his group disability plan. There is no protection for bonus or commission income. And for many career individuals like Tom, bonus income is integral to the career.
In the example above, actual base salary coverage would be $60,000 per year, or $5000 per month ($100,000 x 60% divided by 12 months.)
That is a difference of $42,000/year, or $3,500/month, less than Tom thought he would receive.
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Will You Pay Taxes on Group Disability Benefits?
Continuing with our example claim:
As with many group disability plans, Tom’s employer pays the insurance premiums. Tom’s employer does not include the cost of coverage in his gross income. That means Tom will have to pay taxes on his $5000 monthly benefit.
Assuming Tom’s tax rate stays the same, his disability benefit would be reduced by about 28%, which now leaves him with only $3,600 per month to meet his medical and living expenses.
This is just one example of how taxes may affect your annual budget. If you and your employer split the premium payments, the tax obligation would be split also.
The type of “dollars” used makes a difference – whether pre-tax or after-tax. Generally when you use after-tax dollars to pay your part of the premium, you won’t owe income tax on benefits paid to you that are connected to that part of the premium.
Combine the losses from bonus income and taxes, and Tom’s income is reduced from $170,000 a year, to annual disability benefits of about $43,000 after taxes.
Other Hidden Costs in Group Disability Plans
Many group plans also do not include cost-of-living adjustments so that your income can keep pace with inflation.
Remember that group disability policies are not written to provide maximum income replacement if you become disabled.
For that type of protection, you would look into purchasing a private or individual disability insurance policy, or supplementing your group insurance with an individual disability policy.
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If you were denied long term disability benefits, Social Security Disability or Veterans’ Disability Compensation, we are prepared to help you now. 1-800-562-9830
Unfortunately, it is easy to forget about disability insurance, especially before you need it, and if you do not pay the premiums.
Do you know the hidden costs in your group disability claim? It is important to dig into your policy’s terms and conditions. Do not let unexpected losses and hidden costs destroy your financial stability should disability occur.
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Ask a Disability Attorney about Your Policy’s Language
Seek the assistance of legal experts to fully understand the coverage you have. If you have questions about your policy language, or need assistance with your group disability claim, we are here to help.
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