Is A Disability Insurance Payment Taxable?

1. 

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   Steve Savant

   Syndicated Financial Columnist, Host of the weekly talk show Steve Savant's Money, the Name of the Game, Scottsdale Arizona

   In most cases the disability premium is not being deducted as a business expense, so the benefits that are generated by the policy to the claimant are tax free. However, in some business scenarios, disability insurance is expensed as an executive benefit. Then policy benefits are taxed as ordinary income at the effective tax bracket rate (in this case) of the executive.

   Answered on August 30, 2013

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   Terry A. McCarthy, CLU, ChFC

   President, Insurance Associates Agency Inc., West Chester, OH

   Disability insurance you purchase without the financial contribution of your employer towards the premium expense of individual disability insurance will generally be free of income taxation. This tax treatment results from the circumstances. First, the money used to pay premiums are "after-tax" dollars. In other words, you already paid tax on the money used to pay the disability premiums when it was earned as income. Second, neither an employer or business will take a deduction on their tax returns for the payments made to provide the insurance to you. These two things make the income earned under a personal, individual disability policy free of income tax on the benefits. As a general rule, if a business pays for the a portion of the premium the benefit is probably taxable to some extent even when you contribute. The amount of the benefit that is taxable will be determined by the ratio of the total premium paid, compared against the premium amounts paid by the business and the individual. If the benefit is payable to a business the income is probably taxable. Corporate (or business) owned disability insurance can be designed to provide income or overhead expense protection. Overhead expense protection permits the deduction of cost on tax forms but the income is taxable. There is also the possibility that disability income coverage is used in a buy-sell agreement. When the benefit is paid to a business, as a general rule, the benefit is taxable. As in most instances, this general answer cannot begin to address the variety of complicating circumstances so specific answers are best for specific situations.

   Answered on July 16, 2015

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