The short answer: If you pay the premium for your employer-sponsored (“group”) disability insurance, then, in the event of a qualifying disability, the benefit is paid to you tax free. If your employer pays the premium, the benefit paid to you would be fully taxable as ordinary income
The long answer: Many employers offer disability insurance to their employees. In the event a sickness/injury/illness precludes working for a sufficient period of time (the “waiting period”), the disability insurance policy will begin paying the insured a percentage of their pay. That percentage varies plan-to-plan, but rarely exceeds 66% of the employee’s base pay. For many, this benefit income is financially life saving. But consider how even a generous benefit of 66% would still necessitate substantial changes to lifestyle and reduce, if not eliminate, ongoing savings for goals like retirement.
This is where the benefit of paying your own group insurance premium comes in. It should be noted that while many plans allow you to make the election (during open enrollment) to pay the premium yourself, some plans do not have this option. But for those that do, electing to pay the premium will come at a small cost per paycheck, but the impact on the extent of your group coverage is substantial. Imagine how much more you’d bring home each month if your income weren’t taxed. The same principle applies to the benefit you would receive from your group disability insurance policy.
Goals or no goals, anyone who has been out of work due to a extended sickness or injury will tell you: those are not the circumstances under which you also want to deal with a sharp drop in household income. Simply paying a few more dollars per paycheck can take a lot of the sting out of an already difficult situation and in many cases is the difference between remaining on track for their savings goals or not.
