Florida 2-15 Life, Health and Variable Annuity AgentFlorida Laws and Regulations Specific to Health InsuranceMedium
A Florida resident is covered by an individual disability income policy. If the insured becomes totally disabled and is receiving benefits, which of the following statements regarding the taxation of these benefits is true?
- ADisability income benefits are always taxable, regardless of who paid the premiums.
- BAll disability income benefits received are taxable as ordinary income.
- COnly the portion of benefits exceeding 50% of the insured's average monthly income is taxable.
- DDisability income benefits are generally tax-exempt if the premiums were paid by the individual with after-tax dollars.
Show answer & explanationAnswer & explanation
Correct answer: D. Disability income benefits are generally tax-exempt if the premiums were paid by the individual with after-tax dollars.
If an individual pays the premiums for their disability income policy with after-tax dollars, the benefits received are generally tax-exempt. This is a key tax advantage of individually purchased policies.
Why the other options are wrong
- A. This is incorrect; the taxability depends on whether the premiums were paid with pre-tax or after-tax dollars.
- B. This is incorrect; taxation depends on who paid the premiums and with what type of dollars.
- C. There is no general rule in disability income taxation that taxes benefits exceeding a certain percentage of income.
Taxation of Individual Disability Income
Individual disability income benefits are generally tax-exempt if the policyholder paid the premiums with after-tax dollars.
- Premiums paid with after-tax dollars = Tax-free benefits
- Premiums paid with pre-tax dollars (e.g., employer-sponsored) = Taxable benefits
- Applies to individual policies
Memory trick: After-tax premiums mean After-tax benefits, so they're Not Taxed.