Posts tagged Income
The odds that you’ll suffer a disabling injury or illness are far greater than the likelihood of you dying prematurely. A disability income (DI) insurance policy, used to supplement life insurance coverage, could help protect you from loss of income if you’re unable to work. Indeed, a DI insurance policy might provide even more benefits than you expect.
Typically, a private DI insurance policy can pick up some of the slack if you’re disabled for an extended time. Should you no longer be able to work, you will begin receiving a monthly disability benefit. Normally, the benefit is a predetermined amount, unlike employer-provided coverage, in which the benefit equals a percentage of compensation.
As with life insurance, DI terms can vary widely from policy to policy. Some key variables include the amount of the benefits you’ll receive; the length of the coverage; the requirements for receiving full benefits; the definition of “disability”; the length of the waiting period before benefits begin; any cost-of-living adjustments; availability of partial benefits; and possible non-cancellation features. Naturally, the cost of the premiums also will vary, depending mainly on those variables.
But don’t assume that you must be bedridden to collect any benefits. Frequently, a DI insurance policy will provide “residual benefits” in the event you can work some of the time or if you’re slowly getting back on your feet. Some policies even offer benefits after you’ve returned to work if you are earning less than you did before your disability.
The residual benefits generally kick in when the loss of income is greater than 20% of previous earnings and the decline is due to the medical condition underlying the disability. This feature could be especially valuable to small business owners, including self-employed entrepreneurs, and professionals in fee-based practices, such as physicians, attorneys, and accountants.
For example, suppose a surgeon recovering from a severe illness returned to practice but was able to see fewer patients. If the surgeon’s income was reduced from $50,000 a month to $30,000, the residual benefit could restore income to 80% of the pre-disability level—in this case, $40,000 a month. Similarly, if the side effects of chemotherapy make it too hard for a litigator to appear in court or for a CPA to handle a company’s books, the residual benefits can soften the economic blow.
To see what your coverage may or may not include, take a close look at existing DI policies or any new policy you’re considering and have your insurance agent explain the residual benefits section. The policy might be more valuable than you imagined or the residual benefits may be too restrictive. Those provisions could be a key component of your DI insurance coverage.
Shifting taxable income to other family members—usually children or grandchildren—who are in lower tax brackets is a time-tested tax planning technique. It may enable you to reduce overall taxes for your family. But this strategy could be especially valuable now. Due to the new American Taxpayer Relief Act (ATRA), a new top tax rate applies to ordinary income, while favorable tax breaks for capital gains and dividends are scaled back for upper-income investors.
If you own income-producing property, such as securities or real estate, you’re taxed on the income from those assets in your own higher tax bracket. But your children and grandchildren are likely to be taxed at lower rates, and if you can shift tax liability for the property to the younger generations, your family will pay less in taxes.
Typically, you might give the property to a family member through a direct gift. More sophisticated arrangements may involve the use of a trust. Either way, income from the property is taxed to the family member in a lower tax bracket instead of to you in your higher bracket.
What makes this strategy even more attractive now for upper-income individuals are the tax changes under ATRA. Beginning in 2013, a top tax rate of 39.6% is added for single filers with income above $400,000 and joint filers with income above $450,000 Also, the maximum tax rate for long-term capital gains and dividends of 15% (reduced to 0% for low-income investors) increases to 20% for investors above those same income thresholds.
Suppose you own property that produces annual income of $20,000. If you’re in the top bracket in 2013, you’ll pay $7,920 in tax on the income (39.6% of $20,000). But a child in the 15% tax bracket would owe tax of only $3,000 (15% of $20,000) on the same income—$4,920 less.
There are other tax ramifications to consider, however. A transfer of property is subject to gift tax, although you’re allowed an annual gift tax exclusion ($14,000 per recipient in 2013) as well as a lifetime exemption (for combined lifetime and estate gifts) of $5.25 million in 2013. The biggest impediment to this strategy may be the “kiddie tax,” which applies to investment income above an annual limit ($2,000 in 2013) for a child under age 19 or a full-time student under age 24. In those cases, income that exceeds the threshold will be taxed at the top rate of the child’s parent.
Finally, remember that you’re giving up ownership of property when you transfer it to family members. The best approach is to incorporate income-splitting into an overall plan.
You probably already understand the importance of having life insurance. The proceeds from a life policy can help cover your family’s current expenses and may provide a cushion for the future if you die prematurely. But another kind of coverage—disability income (DI) insurance—is often ignored or neglected. And that’s a mistake, because DI insurance can be even more vital than life insurance in maintaining a family’s financial well-being. A new white paper from the Council for Disability Awareness, an independent nonprofit group, provides these six startling facts.
1. More than one in four of today’s 20-year-olds will become disabled before they retire. (Source: Social Security Administration, Fact Sheet, March 18, 2011)
2. Some 8.5 million disabled U.S. wage earners were receiving Social Security Disability Insurance (SSDI) benefits at the end of September 2011. (Source: Social Security Administration, Office of Disability and Income Security Programs)
3. Ninety percent of new long-term disability claims are the result of an illness, not an accident, and fewer than 5% of claims are work-related. (Source: 2011 Council for Disability Awareness Long-Term Disability Claims Study)
4. The average long-term disability claim lasts 31.2 months. (Source: 2010 GenRe Disability Fact Book)
5. New applications for Social Security Disability Insurance (SSDI) benefits increased 27% from 2008 to 2010. (Source: Social Security Administration, Office of Disability and Income Security Programs)
6. About 100 million workers lack private disability income insurance. (Source: Social Security Administration, Fact Sheet, March 18, 2011)
If you don’t have DI insurance, either through a policy from your employer or one you’ve bought on your own, you can choose from among a wide array of products whose costs and benefits vary widely. Here are several factors you’ll need to take into account.
How a policy defines “disability” is crucial. The best policies pay benefits if you can’t work in your chosen profession, and they don’t consider the nature of an injury.
DI insurance policies generally require a waiting period before paying benefits, and a shorter waiting period normally translates into higher premiums.
Typically, a policy will state how long and under what circumstances it will pay disability income benefits. It could, for example, provide benefits only until you qualify to receive Social Security retirement benefits.
If you opt for a noncancellable policy, the insurer can’t drop you off its rolls if your health declines.
Finally, don’t be seduced by the low costs of a fly-by-night operation. You’ll be better off opting for an experienced company with a good reputation.