Taxation of Disability benefits and Final Thoughts

This blog wraps up our discussion on disability insurance since May is Disability Insurance Awareness Month.  Taxation of disability policies depends on where the coverage is provided.  If it is a policy through your employer and your employer paid all of those premiums, those benefits are taxable to you once you begin to receive them.  The income is taxable in lieu of wages.  If it is a policy you purchase individually, you pay no income tax on the benefits you receive.   Can you have more than one disability policy?  Yes, but it depends on the income threshold.  If your company’s policy will replace 50% of your income but you are eligible to replace 80%, you can purchase an individual policy to make up that difference.  

If you do not have income to replace, you do not have the need for a disability insurance policy.  While some disability policies can be integrated with Social Security, the reliance on government assistance should not be a factor when determining the disability coverage needed.  Depending on your disability, obtaining Social Security benefits can be a complex, difficult, and drawn out process. 

I encourage you to have an audit done of your disability policies – you may have had a job change, purchased a business, or had an income level change that could modify your benefits.  Disability insurance is an integral component of a financial plan and worth consideration.