How Should You Pay Your Disability Premiums
It comes down to two options, and they’re based on the way you pay for your disability insurance premiums:
- There’s the pre-tax option, when you pay for the premium before taxes are taken out of your salary. The cost typically is deducted directly from your paycheck.
- And there’s the post-tax premium, when you pay for coverage with your take-home pay after taxes have been pulled from your earnings.
5 questions to help you choose
Which option to choose will depend on some variables. If you’re contemplating the best way to pay for your long-term disability insurance premiums, here are five questions to ask yourself.
1. Would you rather pay taxes now or when you’re on disability leave?
Your answer to this question might be neither, but that’s sadly not an option. You’ll have to fork over some money to the government at some point. But when?
If you choose the pre-tax option and then need to go on disability leave, you’ll have to pay taxes on your disability insurance payout. Those payouts generally cover between 50 and 80 percent of your salary.
If you choose the post-tax option, you paid taxes before you paid for the premium. That means you won’t have to pay taxes on the benefits you receive if you were to incur a disability.
In almost every case we would recommends the post-tax option when available.
“This makes the benefit tax-free, accomplishing two things: It lowers or possibly eliminates one’s tax obligation during a period of disability when finances might be tight. And it effectively increases one’s income during the disability period as the benefit income is not taxed.