1. 5082 POINTS
    J Paul Wilson CFP, CHFC
    Certified Financial Planner, JPW Insurance Retirement Investments, Halifax, Nova Scotia, Canada
    In Canada, disability insurance payments are usually structured so that the payment is tax free. This applies to individual plans as well as group plans. The basic principle is, if the premium is paid with after tax dollars, then the benefit is tax free. If the premium is deducted as an expense (employee benefit), then the benefit payment is taxable.

    That is why with group insurance plans the premium split is structured so that the employee pays the Long Term Disability (LTD) portion of the premium. This is done to keep the benefit tax free.

    Plans can be structured to provide a benefit to employees with the company paying the premium on the policies and deducting it as an expense. Certain rules need to be followed. Here is an overview: Company pays premium for coverage, gets the deduction, employee does not pay tax on the premium "benefit", but any disability benefit is taxable. In order to offset the income tax, the amount of coverage the employee is permitted to apply for is increased.

    If you have any further questions, or feel that I could be of assistance, please do not hesitate to contact me.

    Answered on July 18, 2014
  2. 10968 POINTS
    Tim Wilhoit
    Owner, Your Friend 4 Life, Brentwood TN
    Here is the basic rule of thumb with taxation on disability benefits, If your employer pays the premiums on your disability insurance, at the time benefits commence on your claim, those proceeds are taxable as income to a certain limit which is different in different states.

    However, if you purchase disability insurance and pay the premiums with your after tax dollars then your benefit proceeds after claim are tax free to you.

    It is the old scenario of paying taxes on the seed or the harvest.
    Answered on March 31, 2017
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