Maryland Life and Health Insurance License Practice Exam

When are group disability benefits considered to be tax-free to the insured?

1. When the recipient pays the premiums

2. When payments are made to healthcare providers

3. When the employer covers the premiums

4. When the benefits exceed 80% of the income

The correct answer is: When the recipient pays the premiums

Group disability benefits are considered tax-free to the insured when the recipient pays the premiums. This situation arises because if the insured pays for the disability insurance premiums with after-tax dollars, any benefits received while disabled are not subject to income tax. Essentially, the tax liability on benefits is based on who is paying the premiums and what the tax status of those premiums is. In contrast, when an employer covers the premiums for a group disability policy, the benefits received by the employee are typically taxable since the payments were made before any taxes were applied. It's important to note that tax implications can vary based on the source of premium payments, and understanding this is essential for both benefit recipients and those purchasing policies. The mention of payments being made directly to healthcare providers or the benefits exceeding a certain percentage of income does not directly affect the tax status of received benefits; those situations are not relevant to the conditions under which disability benefits are taxed. Thus, the key factor in determining whether the benefits received are tax-free lies in whether the premiums were paid by the insured with after-tax income.