There is a way to receive your disability income benefits on a tax-free basis. However, you cannot wait until you are in already sick or hurt. You must pay for your policy with money that has already been taxed. If you pay for your income replacement policy with untaxed money, you will not escape income tax liability when you receive benefits.
Insurance proceeds are generally not subject to income taxes. If you have a car accident and file a claim you are not likely to have to pay taxes on any of the money you receive in benefits. This is also true when you file a a claim after a fire in your home.
Why don't you pay taxes on most insurance proceeds? You don't actually make money. When you receive money from an insurer to fix your car after an accident, you are just being made whole.
Income replacement insurance isn't different because it involves income. It isn't treated differently because it involves physical disabilities. It is different because sometimes people pay for policies with pre-tax dollars.
If you paid the premiums on your policy with pre-tax dollars, then any benefits you receive will be taxable. This is because you got a tax break when you were paying the premiums.
Conversely, if you paid with post-tax dollars you can expect that in most cases your benefits will be tax free.
(Health insurance pays benefits that are not subject to taxation. You can expect to receive benefits on a tax free basis whether post-tax of pre-tax monies are used to pay for your premiums.)
Paying with pre-tax dollars means that the money used to pay for your insurance was not used to calculate what you owe in taxes. In another words, if your taxable gross pay was reduced by the amount of the premiums, you paid with pre-tax dollars
If your employer pays for your disability insurance without a payroll deduction then your premiums are being paid with pre-tax dollars. Your employer is writing off the cost of your premiums. This means that any money you receive will be taxable.
If your premiums are being paid through payroll deduction, your benefits may or may not be taxable. This is because money deducted from your paycheck can be done on either a pre-tax or post-tax basis. You will need to ask your human resources department if you do not know how your insurance is being paid for.
Income replacement insurance carriers will generally allow you to insure no more than seventy percent of your gross income. The insurers want to make sure that you have an incentive to go back to work. Some individuals will choose to stay out of work longer, if their disability checks are too close to potential paycheck. This raises the insurer's costs and also raises the cost of their insurance policy.
Receiving seventy percent of your former income is probably enough to allow you to pay your bills. However if you have to pay taxes on the insurance proceeds, you are going to have to get by on less.
The trade-off regarding this issue is that you will effectively pay more in premiums if you want your benefits to be tax free. Although the cost of the policy will be the same either way, you will pay more in taxes when you are paying premiums if you want your benefit to be received without having to pay income taxes when you do have a claim.
Income replacement insurance is provides critical benefits. If you would not be able to maintain your lifestyle without your earned income, you will benefit from getting income replacement quotes. This insurance may surprise you with its price. It is probably less expensive you may think.
You can get disability insurance rates on the author, Alston J. Balkcom's website. You can get Alaska income replacement insurance quotes as well as information on disability insurance for other parts of the US.
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