Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Health InsuranceEasy
A client receives $2,000 per month from an individual disability income policy for which they pay all the premiums. What portion of these benefits is subject to federal income tax?
- A$2,000
- B$1,000
- C$0
- D$500
Show answer & explanationAnswer & explanation
Correct answer: C. $0
When an individual pays all the premiums for their disability income policy, the benefits received from that policy are generally tax-free. Therefore, none of the $2,000 per month benefit is subject to federal income tax.
Why the other options are wrong
- A. This is incorrect. The entire benefit would be taxable only if the employer paid the premiums and the premiums were tax-deductible to the employer.
- B. This is incorrect. There is no partial taxation in this scenario.
- D. This is incorrect. There is no partial taxation in this scenario.
Taxation of Individual Disability Income Benefits
Refers to how disability benefits received from a policy are treated for income tax purposes, based on who paid the premiums.
- If insured pays premiums: benefits are tax-free.
- If employer pays premiums (and deducts them): benefits are taxable.
- If premiums are paid with after-tax dollars: benefits are tax-free.
Memory trick: Individual pays? Income stays!