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  • Writer's pictureRyan A. Dunn, CFP®

Higher Earners: Your Disability Insurance Might Leave You Way Short

Key Takeaways
Wheelchair in hands

  • Many employers cap the amount of disability coverage they provide for high-earning employees.

  • Supplemental coverage can usually be paid straight out of your paycheck if you’re a salaried employee.

  • Trade groups and professional societies can be a source of group coverage if you’re a business owner or part of a professional practice group with no supplemental coverage offered.

Did you know that according to the Center for Disease Control and Prevention (CDC), one in four U.S. adults will experience some form of disability during their lives? This statistic isn't just sobering from a health perspective; it also underscores the critical role disability insurance plays in safeguarding people's financial stability. The LIMRA 2023 Insurance Barometer Study reveals another fact: over half of American households would face significant financial strain within just one year if the primary breadwinner were to fall ill or become injured.


For many employees, disability coverage provided by their employer offers a measure of protection. Short-term disability benefits can help bridge the gap until long-term disability coverage takes effect in the event of partial or total disability, including mental health conditions. However, it's essential to recognize that these benefits typically amount to only 40 to 60% of base salary and are subject to taxation, resulting in a substantial reduction in income during recovery.



For high-income earners, the disparity between their former earnings and disability benefits is even more pronounced. Executives and professionals may find it challenging to maintain their lifestyle with a significant income shortfall. Moreover, expenses may rise due to necessary home modifications or additional healthcare needs.


Fortunately, many employers offer supplemental disability policies that can mitigate these financial strains. These policies extend coverage beyond the base policy, increasing income replacement percentages or expanding the salary threshold covered. Another important thing to note is that the premiums for supplemental coverage are often competitive, and employees typically pay them directly, ensuring tax-free benefits in the event of disability.

Despite the potential tax advantages, some employers may be unaware of the benefits of having employees pay disability policy premiums. However, forward-thinking companies are beginning to recognize this advantage and offer an option for you to pay the income tax for the premium payment made by your company, resulting in tax-free disability benefits for employees.

Physical Therapy

Alternative Strategies

For those without employer-sponsored coverage, alternative options exist, such as coverage through professional associations or private plans. While private plans may require underwriting and come with higher premiums, they provide essential protection for those who may not have access to employer or association-sponsored coverage.

Ultimately, the decision to invest in disability insurance requires careful consideration of individual circumstances. Factors such as age, occupation, and financial obligations should all be weighed when evaluating the necessity of additional coverage. By taking a comprehensive approach to financial planning, individuals can better protect themselves and their families from the uncertainties of disability.


If you or someone close to you has questions about disability insurance or other income replacement issues, please don’t hesitate to reach out. We’ve helped many clients like you in similar situations.



Ryan A. Dunn, CFP® , is a Wealth Manager at Novi Wealth


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