Maryland Life and Health Insurance License Practice Exam

What factor often affects the treatment of disability income benefits for tax purposes?

1. Source of payment

2. Amount of benefit

3. Type of disability

4. Duration of coverage

The correct answer is: Source of payment

The treatment of disability income benefits for tax purposes is significantly influenced by the source of payment. Generally, if the premiums for a disability income policy are paid with pre-tax dollars, any benefits received from that policy are considered taxable income. Conversely, if the premiums are paid with after-tax dollars, the benefits received are generally not taxable. This is an important distinction because it affects how individuals should plan for their finances concerning disability coverage. The amount of the benefit, the type of disability, and the duration of coverage may play roles in determining the overall value and adequacy of a disability income policy but do not directly influence the tax treatment of the benefits received. Understanding this aspect is crucial for individuals seeking to navigate the complexities of disability income benefits and their tax implications effectively.