Is Disability Insurance Taxable?
When you purchase a disability plan, there are some important disability insurance tax considerations. With an “individual” market disability plan, most of the time you would receive your benefits completely tax free. This is because you have been paying your premiums with “after tax” dollars, and most disability plans take this into account when designing their policies in order to give you tax free benefits in the event that you ever became disabled.
However, please be aware that there are a couple of scenarios that could cause your benefits to become taxable.
- If you are a self-employed individual and you decide to deduct your premiums as a business expense, this could result in your disability insurance benefits becoming taxable should you ever suffer a disability. I would definitely advise you to consult with a tax professional in effort to evaluate if the reduction in current income taxes is worth the long term risk.
- If you have group disability benefits through your employer, the benefits in these types of plans are most commonly taxed, especially if your employer pays your premiums. Occasionally, group plans offered through employers are designed in such a way that the benefits are tax free, such as if the cost of your disability premiums is added to your gross income. So, it’s important to talk with your employer so that you know well in advance whether or not your benefits will be taxable if you ever become disabled.
Hopefully this information is helpful, and as always, we’re here to help!
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