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As we mentioned in the other articles, the main purpose of disability insurance is to to replace an individual's income should they be unable to work as a result of either an accident or a sickness. In this article, we will discuss the wage loss replacement of disability insurance.
A Wage loss replacement plans normally requires that a Directors' Resolution be passed that authorizes the corporation to purchase individual disability policies covering key employees of the business.It is designed to provide the benefits of individual disability policies to key employees, while at the same time maximizing the tax benefits to both the employer and employee.
1. The employer pays all the premiums under the policies and the disability benefits are paid directly to the disabled employees.
The policy may also provide that on the retirement or termination of the employee's service, the policy will be assigned to the employee. One benefit of grouping several individual disability policies is that the insurer may provide premium discounts when the same policyholder owns multiple policies.
2. For tax purposes:
a)This type of program is recognized as a group sickness or accident plan provided it covers two or more employees. There must be a common element for each class of employees, such as senior management or office personnel. The premiums paid by the employer are tax deductible for the employer. Generally,they are not a taxable benefit to the employee but benefit payments less any employee contributions are taxable upon receipt. In case of termination of employment of the employee and acquires the employer's interest in the policy, the insurer usually reserves the right to reduce the benefit amount at that time. This helps to avoid over-insurance.
b) An alternative approach could be for the company to pay the premium by virtue of a directive from the shareholder/employee. The premium would then be considered part of the employee's compensation or salary and would be taxable to the employee. The employer would increase the compensation by the amount of the premium and then deduct the premium payment. The employer would withhold and remit income tax deductions at source for the new higher salary amount. In this way, the disability benefits are not taxable to the employee when paid out.
I hope this information will help. If you need more information of the above subject, please visit my home page at:
http://disbilityinsurance14.blogspot.com
or http://lifeanddisabitityinsuranceunderwriter.blogspot.com/
