The taxation of disability income insurance is straightforward – especially in individual cases. However, surprises can occur if policies are set up incorrectly as unexpected taxation of a benefit reduces available funds at precisely the wrong time.

Individual DI
In terms of taxes, individual DI is rather clear cut. Premiums paid by individual policyholders are non-deductible as they are not considered an eligible medical expense on Schedule A. Also, benefits are not included as income and therefore not taxable.

Employer-Paid DI
In disability income cases where a business entity is involved, the tax implications are varied. Here are some common scenarios:

• If premiums are paid by the employer and the individual is the policyowner, then the business can deduct the premiums. The premium is not includible in the individual’s taxable income, but the benefits are considered income, and therefore subject to taxation.
• The situation is different if the employer structures the business-paid premium payments on an individual policy so that they are part of the employee’s bonus. In that circumstance, the premium is deductible by the business and is included in the individuals taxable income. However, the benefits would be tax free.

Business Overhead Expense (Unknown)
Policies owned by the business or the owner and benefits are paid to the business. Premiums are deductible and the benefits are includible as income to the business and are subject to taxation.
 
If you have any questions, please contact Mutual of Omaha’s Advanced Markets Team at 402-351-4287 or advanced.markets@mutualofomaha.com.
 

Tax Advantages of Disability Income Insurance
 

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