23 - 1Copyright 2008, The National Underwriter Company Taxation of Individual Disability Income Insurance  What is it?  Policy that provides benefits if the insured becomes disabled  Disability may result from accident or illness  The benefit is intended to replace the insured salary during the period of disability  The policy can be obtained through the individual’s employer or it may be purchased as an individual policy by the insured Chapter 23 Risk Management For Financial Planners

23 - 2Copyright 2008, The National Underwriter Company  When it the use of this tool indicated?  Important component of an individuals protection coverage  A vital component for the self employed  Statistics  Only 27% of American income earners have disability income insurance  82% of American workers either have no long term disability coverage or believe the coverage they do have is not sufficient Chapter 23 Risk Management For Financial Planners Taxation of Individual Disability Income Insurance

23 - 3Copyright 2008, The National Underwriter Company  Advantages  Policy will provide benefits equal to a percentage of the insured’s salary for the duration of a benefit period as specified in the policy.  Provides a income for the insured to meet living expenses  Disadvantages  Individually purchased polices can be expensive Chapter 23 Risk Management For Financial Planners Taxation of Individual Disability Income Insurance

23 - 4Copyright 2008, The National Underwriter Company  Tax Implications  Disability income premium payments  Premiums paid by an individually owned disability income policy are not deductible from income for income tax purposes  Premium paid by an employer for disability income policies on behalf of employees are income tax deductible to the employer Chapter 23 Risk Management For Financial Planners Taxation of Individual Disability Income Insurance

23 - 5Copyright 2008, The National Underwriter Company  Tax Implications (cont’d)  Disability income benefit payments  Benefits from individually purchased policies are exempt from income tax  No limit to the amount of benefits that can be received income tax free Benefits received from a policy paid for by an employer are includible in gross income and taxable to the employee  If employee shares in the cost of the policy with the employer  The portion of the benefit attributable to the employee contributions is not taxed  Premiums paid by the employer that are not excluded from the employees gross income  Benefits received by the employee are tax exempt Chapter 23 Risk Management For Financial Planners Taxation of Individual Disability Income Insurance

23 - 6Copyright 2008, The National Underwriter Company  Tax Implications (cont’d)  Tax credits for the elderly and the permanently and totally disabled  Section 22 of the IRC provides an income tax credit to “Qualified Individuals” who were totally disabled when they retired  Credit equal to 15% of the taxpayers IRC section 22 amount  Qualified Individuals  Individuals 65 years of age or older  Individuals under age 65, retired on disability and considered totally and permanently disabled  Inability to engage in any substantial gainful activity  By reason of any medically determinable physical or mental impairment  Which can be expected to result in death, or has lasted for a continuous period of not less than 12 months Chapter 23 Risk Management For Financial Planners Taxation of Individual Disability Income Insurance

23 - 7Copyright 2008, The National Underwriter Company  Tax Implications (cont’d)  Tax credits for the elderly and the permanently and totally disabled (cont’d)  IRC Section 22 “Base Amount”  $5,000 – individuals  $7,500 – married filing jointly (if both qualify)  $3,750 – married filing separately  Gift, estate and generation skipping transfer taxation  No effect of disability premiums or benefit payments  Individual can make cash gifts that the recipient will use to pay premiums  Gift is a present interest gift and would qualify for the annual exclusion ($12,000 in 2008) Chapter 23 Risk Management For Financial Planners Taxation of Individual Disability Income Insurance

23 - 8Copyright 2008, The National Underwriter Company  Alternatives  Self insuring  Purchasing a critical illness policy  Social security disability benefits Chapter 23 Risk Management For Financial Planners Taxation of Individual Disability Income Insurance