As you know, it is wise to have disability insurance coverage to protect you and your spouse from loss of earnings in the event you become unable to work. Studies show that the possibility of permanent disability is far greater then death during a person's normal working lifetime. Total and permanent disability is not only statistically more common than premature death, but can also have a much greater financial impact on the family. Both death and disability can remove a source of family income, but with a disability, family expenditures might actually increase. The disabled person must be fed, clothed, and sheltered, and the family is faced with the possibility of large, ongoing medical expenditures.
Disability insurance needs are usually based on the level of wages that would be lost if you were disabled, e.g., if you make $5,000 a month, you should carry $5,000 per month of disability insurance (although most policies will only replace 60-70 percent of pretax income, especially if the policy payout is tax free). However, a more precise method may be needed to measure the gap between anticipated expenditures and continuing income. This method considers other sources of income, such as investments, and special funding needs, such as unfunded education costs.
The benefits paid under a disability insurance policy can be totally tax-free to you, 100% taxable, or partially taxable depending on the type of policy, who pays the premiums and whether or not they are paid with pre-tax dollars.
I want you to be sure you understand how you would be taxed in the unfortunate event you become disabled. Proper planning now can avoid unpleasant tax surprises later, when you can least afford them.
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