Long Term Disability Insurance Taxes

Is Long-Term Disability Insurance Taxable?

(The answer may surprise you).

Candace Jenkins | October 18, 2019
Long term disability taxes

Taxes can be good, and taxes can be bad. But the consensus is that no one really wants to pay them, because who wouldn't want to save a bunch of money? So what about your long-term disability insurance? Does that fall under the taxable category or not?

For all questions that relate to disability insurance, your local independent insurance agent is your guide. They've been through this process time and time again and know their way around disability policies of all types and can answer any question you may have. But here's a bit more background on the topic before you make that call.

What Is Disability Insurance?

Simply put, disability insurance replaces your income — usually 40% - 70% — in the event of a non-work-related injury, illness, or disability. But there's a number of different types of disability insurance to think about, like:

  • Individual long-term disability insurance: Benefits pay out for years, and sometimes decades, with a long-term disability policy outside of your employment.
  • Individual short-term disability insurance: This is just like individual long-term disability, except the benefits pay out for days and months, instead of years and decades. This will also provide coverage for pregnancy and birth events.
  • Group long-term disability insurance: Group long-term provides coverage to a group of employees through your employer. It provides disability coverage for years and normally a health exam is not needed to qualify. That’s a nice plus.
  • Group short-term disability insurance: Another employer-offered group plan and similar to group long-term disability coverage. The difference is this policy is for months of disability coverage not years. It can also be employer-paid at times.

Government-backed disability programs: 

  • Social Security Disability Insurance: This is a federal, payroll-funded disability benefits program run by the federal government. It provides disability coverage for total disability and illness.
  • State disability programs: State disability programs are offered in only 5 states out of the whole 50. These programs provide temporary disability coverage and the benefits vary from state to state.
Are Long-Term Care Policy Premiums Tax-Deductible

Are Long-Term Disability Insurance Benefits Taxed?

The answer is mainly no, but it depends and there are exceptions to every rule. 

For both individual and group long-term disability policies, the benefits may not be taxable. If the premiums are paid with after-tax dollars (they usually are), then your long-term disability benefits are not taxed. That means you get to keep all of your benefits, and that is huge.

Here’s the exception. If your employer pays your long-term disability premium and they don't include the amount paid in your gross wages, then your benefits will be taxable. And they are taxable to you. It may seem a little wonky, but hey, that’s taxes for you.

If you were to win a brand-new car because you entered a drawing, you'd still be taxed on the winnings. Some say that isn’t right, it’s like paying taxes on a gift, it kind of defeats the purpose. That’s just how the cookie crumbles sometimes.

Is Long-Term Disability Insurance Tax-Deductible?

To put it simply, no long-term disability insurance premiums are tax-deductible. The fact is the IRS does not view your long-term disability insurance premiums as a medical expense. 

Technically they are not incorrect. You are receiving replacement income in the event you become disabled, ill or injured. You are not, however receiving payment for medical care.

The opinions vary greatly on this rule, but the IRS makes their own rules and that’s how the dice roll for this one.

What about for the self-employed, can you deduct your long-term disability insurance premiums?

You would think so, but unfortunately, the answer is still the same. No, the IRS still does not allow you to deduct your long-term disability insurance premiums from your federal taxes. They don’t deem your disability premiums as a medical expense, no matter how you slice the pie.

How an Independent Insurance Agent Can Help

An independent insurance agent can be your knight in shining armor when it comes to figuring out your disability insurance. When you feel like it's hopeless to find the right kind of coverage at the right price, they gallop in with coverage options that all fit right inside your budget.  

And when it comes to getting answers to questions, like tax deductions and so on, they've got your back. Go on, give your local independent insurance agent a call and get going on your long-term disability insurance before it’s too late.

Now, who's ready to get their insurance problems solved?