| Bar Bulletin |
July,
2003 |
| July Articles |
|
Integrating Employee Benefits With Your Financial Plan
By R. Dane Rianhard
As an integral part
of your financial plan, you should certainly include a complete review of
all benefits provided to you by your employer or available to you through
your employer. If you are the owner of the entity this information is
useful to establish for yourself as well. Each financial benefit can have
an impact on your overall financial picture, including medical insurance,
disability income and life insurance, pension benefits, investment options
and long-term care insurance. Some benefits may be paid for by your
employer while you may elect to pay for other benefits that you have
access to through your employer. Considering the tax consequences of who
pays for benefits is a vital part of your planning as well.
This article will
discuss disability income insurance, with particular emphasis on its place
in your financial plan.
Disability Income Insurance
The importance of
disability income insurance in your financial plan is obvious as it is
designed to pay a benefit to replace a portion of your income if you are
disabled due to an illness or injury and are unable to work and provide an
income for your family.
Group Short-Term Disability Income (STD) Insurance
Group short-term
disability income (STD) insurance is generally available only in a
worksite setting. It may be a group, employer-paid product or can be
offered as an individual, supplemental disability income policy paid on a
voluntary basis by the employee. Group STD typically pays a benefit after
one or two weeks of an injury or illness and may pay that benefit for
either three or six months before terminating. Maternity is covered in the
same way as any other disability as long as there is not any waiting
period for what our industry refers to as a preexisting condition.
Because STD
insurance is not readily available in the open marketplace, it is very
important to determine what type and amount of STD benefit, if any, is
available through your employer. There are three forms of STD insurance
benefits - the first two are group coverage, and the third is an
individual type policy.
First, some
employers choose not to insure this benefit at all and the employee is
required to use up his or her vacation and sick leave before the employer
will reimburse any additional amounts.
Second, many
employers provide a fully insured benefit and pay the cost of the
insurance premiums for the employees. In this situation, the benefits,
when received, would count as ordinary income for the employee and taxes
would be owed on those benefits. Benefit payments come directly from the
insurance company, not from the employer.
Third, many
employers provide voluntary STD programs in which the employee can
purchase a contract directly from the insurance company and the premiums
are paid by the employee. Since the employee is paying the premiums, any
benefits received would be tax-free unless the premiums are paid through a
Section 125 plan. Voluntary STD policies may or may not be portable.
It is important to
know what group STD insurance benefits you have, if any, and to dovetail
them with your group long-term disability income insurance.
Group Long-Term Disability Income (LTD) Insurance
While many people
tend to focus on group STD insurance (as the likelihood of using it is
much greater than the likelihood of using group long-term disability
income (LTD) insurance), there is a potentially greater exposure to any
financial hardship caused by a long-term disability. Employees in their
20s, 30s or 40s have so much earning potential ahead of them before they
retire that a prolonged disability could create great financial adversity.
As employees approach retirement, the importance of group LTD insurance
diminishes as their net worth and assets increase.
Disability income
insurance is available to individuals in the open marketplace and is also
offered in the work place as a group benefit on an employer-paid basis and
as a supplemental policy on a voluntary basis with the premiums being paid
by the employee. Many employers make some level of group LTD insurance
available to their employees and often pay the premiums for this benefit.
Like the group STD insurance, if the employer pays the premiums, any
benefits received by the employee are taxable, reducing the net income
received – a calculation that should be plugged into your financial plan.
Some employees
assume that if they have group LTD insurance through their employer that
their income is completely protected in case of a disability. This can be
a misconception and could create difficulties in the event of a prolonged
disability. Many employer plans pay only 60 percent of your salary, and
there is often a cap on the amount paid regardless of your income. A
typical plan might pay 60 percent of your salary up to a cap of $5,000 per
month of benefit. If the disabled employee’s income is $100,000 per year
they would receive 60 percent, or $60,000 per year of benefit. Consider
two important things in this scenario: most people cannot afford a 40
percent pay cut at a time when they may have extra expenses and for those
who earn more than $100,000 there may be no additional coverage. For
example, someone earning $200,000 would receive a yearly benefit capped at
$60,000 – only 30 percent of their income. As part of your overall
financial plan, it is important to consider supplemental disability income
insurance coverage to help cover a greater portion of your income.
Supplemental coverage can be purchased in the open market, but many
insurance carriers offer employer sponsored programs, often on a
discounted basis, that allow employees to purchase individual supplemental
policies. For those employees who do not currently have that as an option,
we recommend that you look to the open marketplace and also talk to your
employer about offering voluntary, supplemental disability income
insurance.
In conclusion, it
is very important to review all of the benefits available through your
employer as you initiate your financial planning. If your employer is not
providing a benefit you would like to have, it is highly recommend that
you discuss it with the human resources contacts within your company.
