The Answer Is: It Depends
Whether your disability benefit payments are taxable depends on what type of policy or plan you have and how your premiums are paid. This post is not intended as tax advice—we’ve outlined some basic information below only. You should always speak with a tax professional regarding your particular situation.
Individual Policies: These are policies that you purchase yourself. Generally speaking, if you pay the premiums with after-tax dollars, the benefits you receive are tax free. However, if you pay with pre-tax dollars or deduct your premiums as a business expense, then your benefits will likely be subject to federal income taxation.
Group Policies: Group policies are those offered through associations such as the ADA or AMA. These types of policies offer special terms, conditions, and rates to members and function much like individual policies, with similar tax consequences. Generally speaking, if you pay the premiums (with after-tax dollars) then the benefits you receive are tax free.
Employer-Sponsored Policies: These types of policies can be less straightforward when it comes to taxes, as the payment of premiums can be structured several ways. According to the IRS website:
- If your employer pays the premium and does not include the cost of the premiums in your gross income, then benefits you receive will generally be fully taxable.
- If the employer only offers a policy, but you pay the entire premium without taking a tax deduction,
then the benefits you receive will generally be tax-free.
- If both your employer and you pay the premiums then the tax liability will generally be split.
If you are unsure what type of policy or plan you have, and you think your employer might be paying the premiums, you can look at your application (there is typically a portion that states who is responsible for the premiums) or talk to your HR department. For more information, talk to your accountant. You can also go to to the IRS website on disability insurance proceeds to find additional information.
It may be tempting to save money by enrolling only in a plan solely paid for by your employer, paying premiums with pre-tax dollars, or deducting premiums as business expenses. But keep in mind that, if you do become disabled, the amount of your benefits actually available to you will substantially decrease if you are required to pay income tax on them.
Selecting a policy is an important decision, and how benefits will be taxed is a significant factor to consider. With statistics showing that one in four dentists will be disabled long enough to collect benefits at some point in their careers, choosing to save now could hurt you financially down the road.
Unum announced last week that Jack McGarry, former CEO of Unum’s United Kingdom arm, has been brought back to the U.S. to manage Unum’s closed block of business. This “closed block of business” includes its individual disability policies issued prior to the mid-1990s–the type of policies that Unum no longer sells. According to Unum Group CEO Thomas Watjen, Unum hopes that McGarry’s experience will benefit the company:
“Our closed block of business represents over 25 percent of our capital, and I’m confident that Jack’s significant financial and operational expertise will help us improve the performance of this business.”
Unum doesn’t explain what it means by “improving the performance of this business.” The policies McGarry will be managing aren’t sold anymore, so he can’t improve that block’s performance by changing the way policies are sold, who they are sold to, or how they are priced. And at this point, Unum has to honor the outstanding policies as they are written, so he can’t lawfully help the block improve performance by skimping on benefit payments.
Watjen’s statement could mean that McGarry, who has discussed Unum’s confusing policy language in the past, will help the individual disability department better serve customers by making Unum’s communications easier to understand. However, it is also likely that “improving the performance” of that block of business means that McGarry will focus the company’s efforts on continuing to scrutinize claims made on the individual policies to avoid paying benefits (and thus save Unum money). Either way, our disability insurance attorneys will be closely monitoring Unum and any new developments under McGarry’s leadership.