Are Disability Income Insurance Benefits Taxable?

Disability income insurance benefits pay a percentage of your gross income when you are ill or injured and cannot work. But if you must live on only a percentage of your income, will your benefits be taxed?

Are Disability Income Insurance Benefits Taxable?

Whether or not disability income insurance benefits are taxable depends on several factors, including the source of your plan, whether you deduct premiums on your taxes, and who pays for the premiums.

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  • Employer-sponsored income insurance – If your disability income insurance is employer-sponsored and your employer pays the premiums, your benefits are taxable.
  • Privately-owned income insurance – If you purchased a private policy and pay the premiums with after-tax dollars, the benefits are not taxable.
  • Deduct premiums on your taxes – According to Internal Revenue Service Publication 535 – Business Expenses, you can deduct disability income insurance premiums on your taxes if you own an overhead insurance plan. An overhead insurance plan pays business overhead expenses if you cannot work due to illness or injury. But if you deduct the premiums, your disability income insurance benefits will be taxed.

How Much Do Disability Income Insurance Premiums Cost?

Disability income insurance premiums cost one to three percent of your income. If you are self-employed, a business owner, or a contractor, disability income insurance provides income when an illness or an injury prevents you from working.

Disability Income Insurance Basics

Before you apply for disability income insurance, it helps to know a few basics about it. Depending on your insurance company, your plan may differ.

  • Age requirement – The minimum age requirement for disability income insurance is 18. The maximum age is 60.
  • Claim waiting period – After your policy is effective, there is usually a 30-day waiting period before you can file a claim.
  • Benefits waiting period – You will receive your first payment in 30 to 45 days after your claim is approved.
  • Percentage of benefits – Most plans will pay up to 60% of your income.
  • Maximum benefit period – Most plans have a maximum benefit period of two to ten years.

For more details, read our post, 6 Facts About Income Protection Insurance You Might Not Know.

Interested in Disability Income Insurance?

If you live in North Carolina and are interested in disability income insurance—or income protection insurance—John Hunt of Hunt Insurance in Raleigh can help. Contact us to schedule a consultation.

6 Facts About Income Protection Insurance You Might Not Know

Income protection insurance can give you peace of mind when an illness or injury prevents you from working. People commonly insure their cars, homes, boats, and other valuables. Why not insure the income you use to pay for those things?

What Is Income Protection Insurance?

Income protection insurance is insurance to protect a portion of your income. If you are unable to work because you are injured or sick, the insurer will pay you part of your gross income.

How Much Will Income Protection Insurance Pay?

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Most income protection insurance policies replace up to 60% of your gross income. Coverage varies with the insurer. But you may be able to boost your coverage with an insurance rider—or an add-on for additional benefits. An insurance rider will increase your premiums. For details, read our post How Much Does Disability Income Insurance Pay?

Income Protection Insurance vs. Disability Income Insurance

Income protection insurance is another name for disability income insurance. The plans provide insurance that protects part of your income when qualifying physical limitations prevent you from working.

Income Protection Insurance vs. Social Security Disability Income

How do income protection insurance and Social Security Disability Income differ?

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  • Acquiring it – You can purchase an income protection insurance policy, but you cannot purchase Social Security Disability Income (SSDI). SSDI is government-sponsored protection for workers who have contributed to SSDI long enough. SSDI deductions are usually withheld from employee paychecks.
  • Qualifying for it – Basic qualifications for an income protection policy include reviewing your health history and lifestyle during the application process.
  • SSDI requires you to prove the following:
    • You cannot work in your current occupation
    • You cannot adjust to alternate work
    • Your disability will prevent you from working for at least one year
  • Disability length – You can receive income protection insurance if you are partially or temporarily disabled. But SSDI requires total disability for at least one year.

The Council for Disability Awareness published disability statistics showing that most illnesses that require time away from work are not covered by Workers’ Compensation or SSDI. And benefits provided are often not enough to meet the injured person’s necessary expenses.

Income Protection Insurance vs. Employer-Sponsored Disability Insurance

An income protection insurance policy is private insurance—separate from employer-sponsored short- or long-term disability insurance. You can receive income from both policies, but the terms and payout may differ. Compare your options to decide how much additional coverage you need.

Income Protection Insurance vs. Private Unemployment Insurance

Income protection insurance and private unemployment insurance have different purposes. Private unemployment insurance is not common, and few insurers provide it.

  • Income protection insurance – Provides coverage if you are ill or injured and unable to work
  • Private unemployment insurance – Provides coverage if you are unemployed due to layoff, job closure, or other qualifying reasons. It supplements unemployment insurance

Interested in Income Protection Insurance?

If you are interested in income protection insurance, Hunt Insurance of Raleigh can help. We will explain plan options in simple terms and give you a hassle-free quote. Contact us by phone, text, or our contact form to request a free consultation.