23 - 1Copyright 2008, The National Underwriter Company Taxation of Individual Disability Income Insurance What is it? Policy that provides benefits

23 - 1Copyright 2008, The National Underwriter Company

Taxation of Individual Disability Income Insurance

What is it? Policy that provides benefits if the insured becomes

disabled Disability may result from accident or illness The benefit is intended to replace the insured salary

during the period of disability The policy can be obtained through the individual’s

employer or it may be purchased as an individual policy by the insured

Chapter 23Risk Management For Financial Planners


When it the use of this tool indicated? Important component of an individuals protection

coverage A vital component for the self employed Statistics

Only 27% of American income earners have disability income insurance

82% of American workers either have no long term disability coverage or believe the coverage they do have is not sufficient




Advantages Policy will provide benefits equal to a percentage of the

insured’s salary for the duration of a benefit period as specified in the policy.

Provides a income for the insured to meet living expenses

Disadvantages Individually purchased polices can be expensive




Tax Implications Disability income premium payments

Premiums paid by an individually owned disability income policy are not deductible from income for income tax purposes

Premium paid by an employer for disability income policies on behalf of employees are income tax deductible to the employer




Tax Implications (cont’d) Disability income benefit payments

Benefits from individually purchased policies are exempt from income tax

No limit to the amount of benefits that can be received income tax free Benefits received from a policy paid for by an employer are includible in gross income and taxable to the employee

If employee shares in the cost of the policy with the employer The portion of the benefit attributable to the employee

contributions is not taxed

Premiums paid by the employer that are not excluded from the employees gross income

Benefits received by the employee are tax exempt




Tax Implications (cont’d) Tax credits for the elderly and the permanently and

totally disabled Section 22 of the IRC provides an income tax credit to “Qualified

Individuals” who were totally disabled when they retired Credit equal to 15% of the taxpayers IRC section 22 amount Qualified Individuals

Individuals 65 years of age or older Individuals under age 65, retired on disability and considered totally

and permanently disabled Inability to engage in any substantial gainful activity By reason of any medically determinable physical or mental

impairment Which can be expected to result in death, or has lasted for a

continuous period of not less than 12 months




Tax Implications (cont’d) Tax credits for the elderly and the permanently and

totally disabled (cont’d) IRC Section 22 “Base Amount”

$5,000 – individuals $7,500 – married filing jointly (if both qualify) $3,750 – married filing separately

Gift, estate and generation skipping transfer taxation No effect of disability premiums or benefit payments Individual can make cash gifts that the recipient will use to pay

premiums Gift is a present interest gift and would qualify for the annual

exclusion ($12,000 in 2008)




Alternatives Self insuring Purchasing a critical illness policy Social security disability benefits



Documents

23 - 1Copyright 2008, The National Underwriter Company Taxation of Individual Disability Income Insurance What is it? Policy that provides benefits