Disability Insurance: Bonus Income
Income and participation limits for disability insurance are based on your income. For group insurance policies, this income typically relates to your base salary and does not cover any bonus income. As such, group insurance policies may cover significantly less than you had anticipated.
For example, I was working with a client of mine this week who is a cardiologist in Texas. He has a base salary of $200,000 and typically receives a bonus of $250,000/year. Although he has a group policy, that group policy will only cover 60% of his base salary to a maximum of $10,000/month. Since the group is paying the premiums, that benefit is taxable. Less than half of his income is covered by his group policy and he is limited even more since the benefits are taxable.
To bridge the gap, he may purchase an individual policy based on the full $450,000 of income. Since it is an individual policy paid for with after tax dollars, the benefits are tax free.
A lot of people receive the majority of their income in the form of a bonus. For example, investment bankers typically receive a small base salary and a significant bonus. Since their group policies typically only cover their base income, they have a great deal of income that is not covered. This gap can be covered using an individual disability insurance policy.
