It’s a question that many clients ask or more specifically, “Can I deduct the premiums for this disability insurance from my taxable income?” It’s also a question most agents hate to get! Taxation can get a bit complicated, especially because the way it is handled varies by product. Here is a handy explanation and guide to help you answer those tax questions that get thrown at you.
“Can I deduct the premiums for this insurance from my taxable income?”
Individual DI
Generally, no. In most cases, individual DI premiums cannot be deducted; however, the benefits at claim come tax free. There are a few exceptions. If your client owns a business that is classified as an s-corp, the premiums for the DI can be deducted as a business expense if the client has 2% or less ownership, but please note that this means the benefits will be taxable! Many carriers allow higher limits in this type of scenario since the benefits are taxed. Also, those who own c-corporations can also deduct the premium regardless of their ownership share. And employers can pay for an employee’s DI coverage and deduct that expense, but again, the benefits would then be taxable at claim time.
Business Overhead
Yes! This type of coverage is very favorable, tax-wise, for a business owner. The premiums can be deducted as a business expense. The benefits at claim time are taxed; however, since it is a reimbursement product, the business owner can still offset the policy benefits by the actual expenses the policy is covering.
Buy Sell/Key Person
The premiums for this product are considered non-deductible, but the benefits are generally tax free. The disabled owner of the policy would be taxed on the gain from the sale of the business.
Here’s a quick guide for further reference:
|
Product Type |
Premium Payer |
Taxation |
Benefits |
|
Individual DI- employee |
Individual |
Premiums are not deductible |
Benefits are received tax free |
|
Business entity |
Premiums deductible by employer |
Benefits are taxable |
|
|
Individual DI- business owner |
Individual |
Premiums are not deductible |
Benefits are received tax free |
|
Sole Proprietor |
Premiums are not deductible |
Benefits are received tax free |
|
|
S-Corporation Owner (2% or less ownership) |
Premiums deductible by employer |
Benefits are taxable |
|
|
C-Corporation Owner |
Premiums deductible by employer |
Benefits are taxable |
|
|
Business Overhead |
Business Entity |
Premiums deductible |
Benefits are taxable as income however the actual business expenses are deductible |
|
Buy Sell/Key Person |
Business Entity |
Premiums are not deductible |
Benefits are received tax free (The disabled owner is taxed on gain from the sale only) |
*This guide is not meant to be comprehensive. If you client has detailed tax questions, it would be best to refer them to their accountant or tax advisor for assistance. This is a general guide only. Please contact DIS for the specific tax codes related to the information above.
