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Disability Ins- better to pay with pre or aftertax dollars

Home Insurance Disability Ins- better to pay with pre or aftertax dollars

  • Avatar Ds2660 
    Participant
    Status: Physician
    Posts: 34
    Joined: 11/20/2016

    My group is making changes to our handling of disability insurance.  I am in favor of having the group pay with pretax dollars as partners typically make >600k, therefore it seems to me a simple math equation where our current marginal tax rate will very likely be higher than a future effective tax rate should one become disabled.  The other way I thought of it is, if paying with after tax dollars, a smaller policy is needed as no taxes will be taken out.  For myself, I estimated a pretax policy will have to be 20% larger in order to provide the benefit I want (about 16k monthly).  Our business manager who is usually pretty sharp on these things feels that individuals should buy the policy with after tax dollars.  Am I missing something?

    #192355 Reply
    Scott at MD Financial Services Scott at MD Financial Services 
    Participant
    Status: Website Sponsor, Insurance Agent, Small Business Owner
    Posts: 370
    Joined: 01/14/2016

    Pre-tax premium payments creates the taxable payment of benefits, this is great if no claims. Post-tax payment of the premiums equals tax-free benefit payments, best if there is a claim. One would rarely have preferred to have tax deducted $3k in premium and then pay tax on $120,000. The issue is you never know until you can look backward to determine exactly what the best strategy would or should have been.

    S. Scott Nelson-Archer, CLU, ChFC with M. D. Financial Services, Inc.
    Direct Phone 713-966-3932, Email [email protected]

    #192404 Reply
    Michael @ BattDouglas Michael @ BattDouglas 
    Participant
    Status: Financial Advisor, Insurance Agent
    Posts: 52
    Joined: 04/13/2018

    Hello Ds2660!  It’s awesome to have input on how your employer benefits are structured.  When we run quotes for Specialty Specific Disability Insurance, when the employer pays for the benefit, the quote will actually be higher than if the physician is using after tax dollars for the premiums.  You may apply for more coverage when it is employer paid.  (Approximately 25% more coverage.)  Good investigating!  We are here when you need us.

    Michael Douglas CLU, CHFC, CFP with the BattDouglas Financial Group
    Direct Phone: (216) 470.2728, [email protected]

    #192715 Reply
    Pharmvest Pharmvest 
    Participant
    Status: Pharmacist, Small Business Owner
    Posts: 19
    Joined: 03/05/2018

    I’ve never been this close to a decision like this, so I might be missing some complexity – but I would think after-tax payments would be best.  I would think you’d want the evaluation for the best plan to assume the best-case-scenario should you need the benefit, rather than the best-case-scenario should you never use the benefit.

     

    For example (but definitely not implying this is rational or something anyone would consider) – if you are planning that it is never going to happen, why carry the insurance at all?

     

    Jason

    #192748 Reply
    Liked by E5797
    Avatar Ds2660 
    Participant
    Status: Physician
    Posts: 34
    Joined: 11/20/2016

    Glad people have a different opinion than I do but I still don’t understand how.  Imagine the same policy with the difference being pre and post tax dollars for payment of premium.

    Policy 1 with pretax:  annual premium of $8k pretax, monthly benefit of $20k, after tax benefit of $15k (with effective tax rate including state of 25%)

    Policy 1 with posttax:  annual premium of $8k posttax (pretax of $12,300 with marginal tax rate of 35%), monthly benefit of $20k, no tax.

    The policy I currently have in place with the expensive undesirable disability carrier pays $11,380 monthly benefit with an annual premium of $4700, including the dividend.

    Seems to me that I could have both pretax policies in effect for a pretax monthly benefit of $31,380 pretax for the same price as the posttax policy (using the $4300 pretax difference in price to pay for the additional policy.  Tax would go up a bit but not enough to change things much.

    #192763 Reply
    Avatar E5797 
    Participant
    Status: Physician
    Posts: 64
    Joined: 01/31/2016

    Wow.  I’m glad I saw this post.

    Reviewing the benefit sheets for my new practice, the group will pay directly $500 of disability insurance directly and we have the option to have any additional premium taken out of salary pre-tax.  I was going to turn in receipts and be reimbursed, but it sounds like it’s probably better to pay with aftertax dollars.

     

     

    #197121 Reply
    Avatar OralMaxillofacial 
    Participant
    Status: Physician, Dentist
    Posts: 16
    Joined: 02/10/2016

    I have thought about this also.  Still haven’t heard a convincing argument but I still pay post tax.  Our company owned life and disability plans are all paid pretax though with the benefactor being the company.

    #197325 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4084
    Joined: 05/13/2011

    My group is making changes to our handling of disability insurance.  I am in favor of having the group pay with pretax dollars as partners typically make >600k, therefore it seems to me a simple math equation where our current marginal tax rate will very likely be higher than a future effective tax rate should one become disabled.  The other way I thought of it is, if paying with after tax dollars, a smaller policy is needed as no taxes will be taken out.  For myself, I estimated a pretax policy will have to be 20% larger in order to provide the benefit I want (about 16k monthly).  Our business manager who is usually pretty sharp on these things feels that individuals should buy the policy with after tax dollars.  Am I missing something?

    Click to expand…

    I’d pay with pre-tax if I were given the option. I never was. So I always paid post-tax. Like most, never was disabled. The deduction would have been nice, but I would have had to buy a little larger policy which would have not been so nice. Certainly for those docs who can’t buy as much as they want, the pre-tax would not be great.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #197629 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 1443
    Joined: 09/18/2018

    The numbers are clear, the choice isn’t.
    What is the benefit you want?
    Disability payments subject to tax?
    Disability payments tax exempt?
    Either is fine.

    #197644 Reply
    Liked by Larry Ragman
    Avatar Larry Ragman 
    Participant
    Status: Other Professional
    Posts: 392
    Joined: 08/30/2018
    Earnest refinancing bonus

    I’m with Tim, either is fine as long as you get adequate disability insurance while working. My employer offers the choice, and it can be revisited each open enrollment period in the Fall. I have generally opted for the tax free payout since the benefit itself is 2/3 current salary.

    #197699 Reply
    Liked by Tim
    Avatar Raster 
    Participant
    Status: Physician
    Posts: 38
    Joined: 02/01/2016

    I spoke with my CPA about this issue and according to him, this is not a forever decision.  The taxability of the benefit depends on if that year’s premium was deducted or not.  This is kind of neat because it allows you to titrate the amount of disability insurance you have much more easily than buying/dropping a policy.  I paid for my second disability policy with pretax funds the first two years and since I have paid with post tax funds to get the max benefit.  It’s a 50+% increase in cost for a 35+% increase in benefit, but as I have the maximum they will sell me, it is worth it.

    At the end of my career I may go back to having the premium be pretax.

     

    #197886 Reply
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 338
    Joined: 02/11/2019

    Wouldn’t this be similar to the roth/traditional retirement decision?

    If you could make the payments on a pretax basis at your marginal rate but then if you become disabled get the payout at your effective rate?  That is a win right?  Even if you need a slightly larger plan.

     

    “Never let your sense of morals prevent you from doing what is right.”

    #197917 Reply

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