Disability Insurance and Taxes

When you’re choosing disability insurance, taxes are an important consideration. The time to make sure your questions about disability insurance and taxes are answered is before you purchase a disability policy. That’s because the answer to the question of whether or not benefits are taxable is based on the manner in which policy premiums are paid.

Disability Benefits That Are Not Taxable

Disability Benefits are not taxable if the policy premiums are paid by post-tax dollars. When you take out an individual disability policy that you pay for yourself, you’ll be using money that you’ve already paid income tax on to pay the premiums. If you become disabled and receive disability benefits, the funds you receive will not be taxable.

Disability Insurance Taxable Benefits

Typically disability insurance benefits paid under a group disability benefit program are taxable as ordinary income. That’s because the policy premiums are either paid by the employer or are paid by the employee with pre-tax dollars under a payroll deduction plan. Keep in mind that any benefits you receive under a policy with premiums paid with pre-tax dollars are subject to income tax liability.

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