Illinois Health Insurance Practice Exam

What is typically true about tax implications for individual disability income policy premiums and benefits?

1. Premiums can be fully tax deducted

2. No tax on benefits

3. Both premiums and benefits are tax-free

4. Premiums cannot be tax deducted; benefits are tax-free

The correct answer is: Premiums cannot be tax deducted; benefits are tax-free

The correct answer highlights the conventional tax treatment of individual disability income policies. Typically, premiums paid for individual disability income insurance are not tax-deductible. Therefore, individuals cannot claim these premiums as a deduction on their tax returns. This means the policyholder uses after-tax dollars to pay for their premiums. On the other hand, benefits received from the policy are generally tax-free. When the insured person collects benefits due to a qualifying disability, those payments do not incur income tax, allowing the recipients to receive the full benefit without tax obligations. This understanding of tax implications is important for individuals considering purchasing such policies because it clarifies the impact of these costs on their overall financial planning. The other options do not accurately reflect this standard treatment of individual disability income policies, as they either incorrectly state that premiums can be deducted or misrepresent how benefits are taxed.