Do you have life insurance or disability income insurance through your employer? If so, it’s important to make sure that the payment – if deducted from payroll – uses after-tax dollars. Likewise, if you’re self-employed or a small business owner, you should not pay for the policy through the company. Instead, you should pay for the disability income or life insurance through your personal finances rather than the company’s.
Unlike health insurance, you don’t want disability income insurance paid with pre-tax dollars. Using pre-tax dollars means that the disability benefits will eventually be taxed. That’s why it’s best to pay the policy premiums with after-tax dollars. Because then when the benefits kick in, they’re tax-free. This is important for life insurance, but also incredibly important for disability income insurance. Since it’s meant to replace your income in the event that you have a debilitating illness or accident, you don’t want your disability benefits taxed. Though it’s not replacing all your income (about 60-70% of income), you still don’t want it to be reduced due to taxes.
Since insurance is oftentimes overwhelmingly confusing, we want to shed light on this industry by answering YOUR questions. So if you have any questions or concerns, comment below and your question may be the topic of our next video!
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