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Disabilty insurance premiums... pre or post tax?

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  • Disabilty insurance premiums... pre or post tax?

    I am in the process of getting my disability insurance. In today's post it briefly mentioned about paying the premiums pre vs post tax with the benefits being paid tax free depending on which way you pay the premiums.  I'm sure it's been discussed before, but it wasn't in the top ten hits when I searched.


    Odds are that one won't become disabled, so most people would presumably have the most financial benefit from paying premiums with pretax dollars. I guess that's a personal choice on what you think the odds are that you will become disabled in the future. 


    Is there a rule of thumb when it comes to paying premiums with pre or post tax money? What kind of situations (such as a high earning spouse, debt burden, etc) would change the rules? 


  • #2

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    • #3
      Vote for pre-tax.

      The goal shouldn’t be to insure 100% of your income, or even the max amount you are able to get but rather what you need. Subjective call, just like term life.

      Like already mentioned, the math favors pre. You almost certainly will have a much higher effective tax rate now than when collecting if disabled.

      For example, if you’re currently paying for $8000/month benefit with pos-tax dollars, I’d advocate for $10,000/month benefit with pre-tax dollars instead.

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      • #4

        While the math favors pre-tax, the problem is that pre-tax coverage is available only through group policies which are typically sub-par to true OO personal disability coverage. The coverage you personally buy will be post-tax and, for various reasons, I believe it is important coverage to include in your plan until you are financially independent.

        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5



          Not true that it needs to be a group policy


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          Oh! I would love to find out more about that - can you tell me more? Perhaps I haven't looked in the right places.

          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6



            Vote for pre-tax.


            The goal shouldn’t be to insure 100% of your income, or even the max amount you are able to get but rather what you need. Subjective call, just like term life.


            Like already mentioned, the math favors pre. You almost certainly will have a much higher effective tax rate now than when collecting if disabled.


            For example, if you’re currently paying for $8000/month benefit with pos-tax dollars, I’d advocate for $10,000/month benefit with pre-tax dollars instead.


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            paying for it post tax is a way to increase your max benefit if needed.  I became a diabetic 5 years after I bought my policy and due to the disease I'm not eligible for increases in my payout.  My policy is for 10k/month for 10 years which would replace about 33% of my income.  If I were to become disabled before I turned 40 I'd be much better off paying post tax.  Perhaps when I'm in my 50's I'll switch to pre-tax or maybe even cancel the policy all together if I become FIRE.

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            • #7

              Wondering for folk in university setting if they have given up their Own Occ private disability insurance or not.  There's Short term disability and the university pension will cover long term too (but not own occ from my understanding).   Still have mine from residency days that covers enough to retire on at this time, but just wondering if still need it and go spend those $$$ on nice monthly broadway show tickets


               

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              • #8



                Wondering for folk in university setting if they have given up their Own Occ private disability insurance or not.  There’s Short term disability and the university pension will cover long term too (but not own occ from my understanding).   Still have mine from residency days that covers enough to retire on at this time, but just wondering if still need it and go spend those $$$ on nice monthly broadway show tickets ????


                 


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                I kept my own policy in case I switched jobs, even though I always thought there was a very low likelihood of that happening. Lo and behold, I am moving on to a different job. You just never know. 

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                • #9



                  There is no requirement that the policy that a group purchased is a group policy. Many do it bc it’s cheaper for the group. In situations like people here where the owner and employee are the same person, you aren’t exclusively focused on cost of policy.


                  It is true group policies are inferior. By the way you can actually purchase those post tax if desired.


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                  To be deductible to the employer and nontaxable to the individual, yes, it would need to be a group policy. To be eligible for this beneficial treatment, employee benefits cannot discriminate in favor of one employee over another. Purchasing individual policies for separate employees would, at least akaik, violate this requirement. If you can find something in the code that states otherwise, I would like to know about it.


                  The only way I know of around this is to operate inside a PSC with only one employee and provide disability insurance benefits for employees.

                  Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                  • #10


                    Purchasing individual policies doesn’t for everyone isn’t a problem.
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                    What?




                    Why do you think there are so many threads about pre and post tax?
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                    The threads about pre- and post-tax are for group (pre) versus buying for yourself (post). An employer can certainly buy individual disability policies for individual employees; the premiums just cannot be excluded from taxable income.


                    Fringe benefit nondiscrimination rules

                    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                    • #11



                      Can u point to where in that it says you can’t buy individual policies for everyone in the group.


                      I’m pretty sure you might want to confer with WCI or some agents on this


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                      No, and neither can I point to where it says you cannot buy a Tesla for everyone in the group as a nontaxable fringe benefit, either.


                      I actually have conferred with an agent on this.

                      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                      • #12

                        There is a way for employers to deduct premiums for individual disability policies while keeping the benefits tax free to the employees. The employer deducts premiums from an employee's earnings but pays the employee a bonus to cover the cost. The bonus is included in the employee's taxable income. To offset taxes due on the bonus, the employer may elect to increase the bonus amount.

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                        • #13

                          What my disability agent, Michael Relvas, wrote to me. I think he is an advertiser on WCI. I looked it up and seems correct:


                          ------------>

                          Honestly, I don't believe that you even have the option of deducting the premiums, so it may be a mute point. An S-Corporation can technically deduct the premium, but then the owner must include the premium as taxable income on his/her own tax return - therefore not a true deduction. Only C-Corporations can take a true deduction on the premiums for individual disability insurance. Here is a reference point, http://www.irs.gov/publications/p535/ch06.html#en_US_2012_publink1000208842 -> Go to the section on "Nondeductible Premiums" toward the bottom. 

                          Brief disclosure: I am not an accountant, and therefore cannot provide you with concrete tax advice. I would suggest you contact your accountant or CPA on this too  

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