Physician Long term Disability- Premium pre or post tax

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ram
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Physician Long term Disability- Premium pre or post tax

Post by ram »

As of Oct 1, 2014 my employer, a large healthcare company is changing the physician long term disability product. The change was to decrease the cost of it to the corporation. The current policy pays 66.7% of current income upto a maximum of 15,000/ month. The new policy will pay 60% of current income upto a max of 15,000.
The employer is paying and will continue to pay the premium. The policy is for 'own job' upto the subspecialty level and that will remain unchanged. At the present time the premia are going in tax free and the payout in case of disability will be taxed.

Now the employer is offering us to have the premium paid post tax. In that case the the disability payments will be non taxable. I have asked for clarification to the HR dept but as I understand it, if you elect for post tax premium the employer will pay the premium and will add it to your salary, so that tax gets paid on it. The physician employee will will only be paying tax on the premia at his marginal rate (say 35%).

The employer is pointing out that for a physician making 200K the post tax disability benefit payment will be 100 K (200,000 x .667 x .75 at 25% tax rate) Vs 120 K if tax free at the new rate (200,000 x 0.6). The payment of tax on premia will of course not be a cost to the corporation.

Question- What option is better, payment of premia pre tax or post tax. Upto what salary level? Thoughts.

(The change is less relevant to physicians making $300 K/ yr or more.)
Ram
miba
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Re: Physician Long term Disability- Premium pre or post tax

Post by miba »

I am not a physician but was a high income earner prior to going on disability. I was 50% owner of the company. Still kicking self in butt for not paying the premiums out of pocket. Half of my payments go to the IRS and state and could have been avoided. My broker did me a disservice. The policy pays me 6500 per month, sounds great, right?! Not after taxes (and now SSDI is taxed as well) but grateful I had the wherewithal to have a policy at all! Hopefully you will never go on disability but if you do, I say post tax unless you absolutely cannot afford it.
dhodson
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Re: Physician Long term Disability- Premium pre or post tax

Post by dhodson »

If you look at the math then the math says better deal pretax........but i still wouldnt do it that way.

The reason is primarily as noted above that IF you ever become disabled, you will in essence be much closer to your previous salary (since its tax free if done post taxes).

You have such a good deal (assuming its a good policy) that i personally would have it paid post tax.
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semperlux
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Re: Physician Long term Disability- Premium pre or post tax

Post by semperlux »

+1 for post tax

I calculated the amount of disability coverage to buy based on what I take home post tax. If I paid for it with pretax money, it would be a lot less after Uncle Sam had his way with it. Also, if you try to buy enough coverage to account for the tax (so that you could pay pre-tax), it'll be hard since disability coverage maxies out at something like 60-65% of your gross pay. My current job offered me same coverage for slightly less premium but is mandatory paid with pre-tax money. I declined & continue to pay my original policey with post tax money, albeit slightly more expensive premium.
Calm Man
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Re: Physician Long term Disability- Premium pre or post tax

Post by Calm Man »

Doctor,
Which is a higher dose to you: 100 mg or 1.5 mg/kg? You can't answer until you know the weight. What is the premium and tax you will pay now. Is it a nickel or a million dollars or somewhere in between?
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Re: Physician Long term Disability- Premium pre or post tax

Post by bluemarlin08 »

I've seen situations where the corporation would make a decision at year end whether to reimburse premiums paid personally after tax. I no claim they would reimburse
miba
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Re: Physician Long term Disability- Premium pre or post tax

Post by miba »

Here is my personal example. My private disability pays me $6500 per month. Had I paid with post tax dollars none of it would be taxed. Because the company paid for it (even though it was MY company), I pay tax. So maybe a closer look at the policy is needed. Are you paying for it yourself and thus the income will not be taxable? I am currently paying state and fed taxes around 46% (?). If I get really sick, they kick in another 4K per month but that will only equate to about half after taxes. I have to pre-pay my taxes every quarter. Part of my SSDI is also taxed. Also, it took nearly a year for them to approve so I got retro payments. I was unaware the income was taxable and got hit with a 50K tax bill. It was awful. Bottom line is whatever the premium is, I'd pay it myself; if you become disabled your life will be a whole lot better and less complicated if the disability income is tax free income.
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Re: Physician Long term Disability- Premium pre or post tax

Post by BruDude »

You're much better off paying tax on the value of the premium and getting the benefits tax free.
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Artsdoctor
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Re: Physician Long term Disability- Premium pre or post tax

Post by Artsdoctor »

With the tax structure being so unpredictable, I would strongly urge you to pay your premiums with post-tax dollars. If you're really going to be on disability, you're not going to want to be bothered with having 1/3-1/2 of the disability policy income taxes (see above post).
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CMartel2
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Re: Physician Long term Disability- Premium pre or post tax

Post by CMartel2 »

When I bought disability insurance, one thing I found useful for myself was to first ask what I was buying and why--what was disability insurance for, and was the policy I was looking at accomplishing that or trying to do even more than what I needed it to do. The role of disability insurance is, in my mind, to protect the income that I made prior to becoming disabled. It was to preserve my lifestyle. When you're looking at disability insurance, you can't even ensure 100% of your income--only a fraction--be it 60-65%. Thus, it my eyes, it makes far more since to pay with post-tax dollars. You're wanting to preserve as much income as possible.
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Re: Physician Long term Disability- Premium pre or post tax

Post by Rajsx »

Take it from a disabled doc, pay the premium post tax. Remember the very reason for taking on this Insurance is for the rainy day, make the rainy day a little more comfortable.

Best
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RooseveltG
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Re: Physician Long term Disability- Premium pre or post tax

Post by RooseveltG »

Post tax.

During your working years, you have options to work harder (if not an employee) or longer if you have not met your financial goals.

If you become disabled, you have no options.

I think it makes more sense to pay for disability insurance with pre-tax dollars while you have flexibility and earning potential.

Roosevelt.
Sagenick48
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Re: Physician Long term Disability- Premium pre or post tax

Post by Sagenick48 »

For the long term policy post tax. That is what I did, and I paid for 35 years and never collected a dime.
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ram
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Re: Physician Long term Disability- Premium pre or post tax

Post by ram »

Thank you everybody for the advice. I plan to pay post tax. Apparently it is taking longer than expected for the employer to set this up.
Ram
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ram
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Re: Physician Long term Disability- Premium pre or post tax

Post by ram »

Calm Man wrote:Doctor,
Which is a higher dose to you: 100 mg or 1.5 mg/kg? You can't answer until you know the weight. What is the premium and tax you will pay now. Is it a nickel or a million dollars or somewhere in between?
I get your point. I am still waiting for all the details.

But as the average adult patient weighs more than 66.7 kgs the 1.5 mg /kg would be the higher dose. But I agree with you that exact weight of a given patient would be better data than averages.
Ram
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Re: Physician Long term Disability- Premium pre or post tax

Post by spectec »

Paying premiums post tax is much preferred, as most others have stated. If you ever become disabled, getting 100% of those benefits will be valuable. Consider the difference between the pre-tax income and the post-tax income to simply be additional premium. Just like all insurance, it's a waste of money if you never need it, but a bargain if you do become disabled.
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Re: Physician Long term Disability- Premium pre or post tax

Post by White Coat Investor »

If I was offered pre-tax premiums, I'd take them. There's a 6/7 chance you won't ever get benefits, but the pre-tax premiums are guaranteed. Plus, those benefits will be much less taxed than your current income, since it'll be a lot less income. A bit of arbitrage there really. This assumes you can get enough coverage of course. If you can't you may have to take the after-tax option.
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Re: Physician Long term Disability- Premium pre or post tax

Post by White Coat Investor »

BruDude wrote:You're much better off paying tax on the value of the premium and getting the benefits tax free.
Only if you actually collect the benefits. If you don't (which is far more likely) you're better off vice versa.

I think this "truism" hasn't really been looked at carefully.
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Re: Physician Long term Disability- Premium pre or post tax

Post by LeeMKE »

Odds are 1 in 7 you will need to use the disability policy at some point.

I paid my own policy and did it post tax because if I needed it, the coverage would be closer to my aftertax income. Thankfully I never had to use mine. Once my portfolio reached the point that it could take over, I was able to stop paying for the disability policy.
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Re: Physician Long term Disability- Premium pre or post tax

Post by dhodson »

In my experience it isn't 1 in 7

Frankly it's like 1 in 100 especially if we are talking about long term disability which is what really matters

I'd pay post tax as I mentioned but as I also mentioned the math favors pretax
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Re: Physician Long term Disability- Premium pre or post tax

Post by TN_INVEST »

EmergDoc wrote:If I was offered pre-tax premiums, I'd take them. There's a 6/7 chance you won't ever get benefits, but the pre-tax premiums are guaranteed. Plus, those benefits will be much less taxed than your current income, since it'll be a lot less income. A bit of arbitrage there really. This assumes you can get enough coverage of course. If you can't you may have to take the after-tax option.
I don't have the answer, but here's something to think about: there is a fair chance that if/when you do get disabled, you may have lots of deductible medical bills that could drive your effective tax rate even lower.
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bertie wooster
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Re: Physician Long term Disability- Premium pre or post tax

Post by bertie wooster »

I pay with post tax dollars. I see the point of the above posters about the one in seven chance of needing the policy, but I don't have a cost of living rider (I got a future increase option to get a larger benefit when I'm done training) so extra taxes on top of the loss off my benefit to inflation would really hurt I think.
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Re: Physician Long term Disability- Premium pre or post tax

Post by tphp99 »

If you are able, couldn't you make the election to run the premium through the company (PC, LLC, S / C-corp - what have you) at the end of the year? So in December and all is well, elect to pay the premium with pre-tax dollars. But if you get hurt, don't run the premium through the company that year (thus after tax) and the benefits will be tax-free.

Seems like cheating or at least questionable - so I have not done so. But saving a few thousand bucks per year on DI premium is tempting.

What's the IRS ruling on this?
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Re: Physician Long term Disability- Premium pre or post tax

Post by Wildebeest »

I never wanted to get disability insurance. As far as I am concerned it is a racket. This works great for the profit margin of the insurance company and I see them in league with your friendly Merrill Lynch, Edward Jones and Wells Fargo rep.

My spouse feels differently so I got an expensive policy.

If you think there is good chance you might end up with disability, of course you are better off with paying it post tax dollars. I did even while I felt the chance I would collect on it would be as likely as landing on Mars.

I was delighted to reach the point we were financial independent and weI could drop life insurance and disability insurance.
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Re: Physician Long term Disability- Premium pre or post tax

Post by Artsdoctor »

tphp99 wrote:If you are able, couldn't you make the election to run the premium through the company (PC, LLC, S / C-corp - what have you) at the end of the year? So in December and all is well, elect to pay the premium with pre-tax dollars. But if you get hurt, don't run the premium through the company that year (thus after tax) and the benefits will be tax-free.

Seems like cheating or at least questionable - so I have not done so. But saving a few thousand bucks per year on DI premium is tempting.

What's the IRS ruling on this?
I don't think you can switch back and forth between pre-tax and post-tax premiums. If you did so, I would think that the best situation would be that your payments, if you ever needed them, would be partially taxed. This can occur if your employer pays for your premiums in pre-tax dollars, you take the disability plan with you when you leave, and then you pay the premiums in post-tax dollars.

All of that said, you'd want to ask your accountant about this.

Whether or not you choose to pay in pre- or post-tax dollars is a personal decision. You will most likely not use your policy so it's attractive to think that you'd pay your premiums in pre-tax dollars. However, like all insurance, you'd only use it for serious situations. For me, as much as I like minimizing taxes, I can afford to absorb the tax hit while I'm gainfully employed--but if I'm disabled, I'm going to want the full use of my disability income. I HOPE I'll never need to use my policy, and when I retire having never used it, I won't complain; this is the nature of any insurance.
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Re: Physician Long term Disability- Premium pre or post tax

Post by BolderBoy »

tphp99 wrote:If you are able, couldn't you make the election to run the premium through the company (PC, LLC, S / C-corp - what have you) at the end of the year? So in December and all is well, elect to pay the premium with pre-tax dollars. But if you get hurt, don't run the premium through the company that year (thus after tax) and the benefits will be tax-free.

Seems like cheating or at least questionable - so I have not done so. But saving a few thousand bucks per year on DI premium is tempting.

What's the IRS ruling on this?
No idea. But I had a friend who ran his one-employee S-Corp this way for many years (may still be doing it, for all I know.)
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Re: Physician Long term Disability- Premium pre or post tax

Post by jsa307 »

BolderBoy wrote:
tphp99 wrote:If you are able, couldn't you make the election to run the premium through the company (PC, LLC, S / C-corp - what have you) at the end of the year? So in December and all is well, elect to pay the premium with pre-tax dollars. But if you get hurt, don't run the premium through the company that year (thus after tax) and the benefits will be tax-free.

Seems like cheating or at least questionable - so I have not done so. But saving a few thousand bucks per year on DI premium is tempting.

What's the IRS ruling on this?
No idea. But I had a friend who ran his one-employee S-Corp this way for many years (may still be doing it, for all I know.)

This has come up recently in my practice as well. Colleagues pay the premium through the corporation- then declare it pre-tax or post-tax on your returns, depending on if a disability occurs during the year or not. If a disability occurs during the year you've declared it pre-tax, you'd have to cover it yourself before the policy renews (although there is always some elimination period anyway). This certainly doesn't seem to be "in the spirit" of things, but does anyone know if you actually can or can't do this? Thanks!
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Re: Physician Long term Disability- Premium pre or post tax

Post by Dottie57 »

semperlux wrote:+1 for post tax

I calculated the amount of disability coverage to buy based on what I take home post tax. If I paid for it with pretax money, it would be a lot less after Uncle Sam had his way with it. Also, if you try to buy enough coverage to account for the tax (so that you could pay pre-tax), it'll be hard since disability coverage maxies out at something like 60-65% of your gross pay. My current job offered me same coverage for slightly less premium but is mandatory paid with pre-tax money. I declined & continue to pay my original policey with post tax money, albeit slightly more expensive premium.

+1 for post tax. If you become disabled, then you may really need the $$. Pay tax now so you don't have to on any possible future payments.
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Re: Physician Long term Disability- Premium pre or post tax

Post by ram »

I started the post a couple of years ago. I have been paying the premium post tax. The disability payment will therefore not be taxed.
As the payment is capped at a much lower amount than what I earn I am more comfortable having the whole amount of disability ( in case it comes to that) rather than paying a tax on the disability payment. In fact my my employer pays the premium so I am never going to drop it. All I am paying is the income tax on the premium.
Ram
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gasdoc
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Re: Physician Long term Disability- Premium pre or post tax

Post by gasdoc »

I believe the amount of max insurance is capped on the assumption that it will be paid post tax. They don't want you to be able to get your full salary, tax free. That would be a significant raise in income, and too much incentive to make a claim. Also, you pay higher premiums for higher benefit amounts, so better to maximize the benefit by taking it post tax.

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Re: Physician Long term Disability- Premium pre or post tax

Post by qwertyjazz »

You cannot simply compare tax rates pre and post. Using that logic you would never getting insurance. You want to compare the marginal utility of the proportional extra dollar vs the growth if difference invested. If disabled an extra dollar would be worth a lot more and would likely dominate. I would go post tax.
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jsa307
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Re: Physician Long term Disability- Premium pre or post tax

Post by jsa307 »

jsa307 wrote:
This has come up recently in my practice as well. Colleagues pay the premium through the corporation- then declare it pre-tax or post-tax on your returns, depending on if a disability occurs during the year or not. If a disability occurs during the year you've declared it pre-tax, you'd have to cover it yourself before the policy renews (although there is always some elimination period anyway). This certainly doesn't seem to be "in the spirit" of things, but does anyone know if you actually can or can't do this? Thanks!
is any one able to comment specifically on this aspect of the issue? thanks!
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