Tax-Free Income When You Work Or When You Can’t Work

Many people take for granted their employment and ability to earn income during their working years. As experience is gained and more complex occupations are engaged over time, the income may substantially increase and the lifestyle may change dramatically. When you are healthy, the dreams of a bigger home, nicer car, and a higher level of recreational activities may become a reality. As the income grows larger, however, so do the bills. The bills are paid regularly – until disaster strikes!

An interruption of cash flow – income – can generate a siginificant catastrophe. If you suffer any type of severe disability – heart attack, stroke, cancer – your capacity to earn the same level of income may be destroyed. Of course, the bills still have to be paid, based on the old income and the lifestyle set in place. What resources become available to replace the income that you just lost?

Disability insurance can offer major protection against the loss of income, whether you work or whether you don’t work. If you suffer some type of disability, and can work some of the time (but not all of the time), you may experience a serious loss of income – a disability policy can replace that income based on the percentage of income lost (current income vs. the income earned prior to the disability). If you can’t work at all in the occupation due to the disability, the policy can replace that income with a full benefit.

Disability may be available through the employer (group insurance for employees), you may purchase the coverage on your own, or you may create a combination of the two programs. If the employer pays the premium for the coverage for you, the proceeds may be received as taxable income; if you pay the premiums for the coverage yourself, the proceeds would be received tax-free.

Insurance companies want to be sure there is an incentive to return to work, and the percentage of income which you can purchase is assigned according to the income earned – generally in a range of 50 – 65%. Every policy from every company is different – this product is therefore difficult to shop for the most competitive rate. If you were to buy the cheapest product on the market, you could be making a serious and costly mistake.

The definition of disability will have a major impact on what triggers a payment. If the definition is defined as the ability to work in your occupation, regardless of your ability to work elsewhere, you could receive substantial benefits. If the definition is defined as your ability to work in your occupation, and not working elsewhere (or not working by reason of education, training, and experience), the payment of proceeds could be a lot less – you could receive a partial disability benefit (proceeds offset by the income earned elsewhere) instead of a full benefit.

A residual benefit within the policy permits you to keep working, but receive proceeds based on the income lost due to the disability. The elimination period defines when the benefits kick in (e.g., after 90 days – the first 90 days of income lost come out of your own pocket), the cost of living adjustment helps the proceeds paid keep pace with inflation, the benefit period determines how long the proceeds will be paid, and various riders may be purchased to enhance the level of protection.

It should be noted that the type of work performed will have a major impact on the type of contract which can be purchased and the premiums assigned for the program. An electrician will have a different occupational classification than an accountant, a sales manager will have a different occupational classification than a physician, and an administrative assistant will have a different occupational classification than an attorney.

It should also be noted that the amount of individual coverage which may be purchased may be impacted by other coverage already placed in force. If no other coverage has been placed in force, a full benefit may be purchased (based on income). If a group insurance policy is placed in force before an individual policy is purchased, the amount of group insurance benefits will be factored into the amount which can be secured individually.

If you would like a quote for disability insurance benefits, please send us an e-mail at  You can also call us at 1-888-972-0024 from 9 AM to 9 PM Eastern Standard Time.  We look forward to hearing from you!