Chapter 7 Review — Disability Income Insurance

Income taxation rules with respect to disability income insurance generally provide that premiums are not deductible, but benefits are received tax-free. An exception applies to policy premiums paid by an employer on a policy owned by the employee — in such a case, the premiums are generally tax deductible to the employer and non-taxable to the employee, but when received, benefits are taxable to the employee.

Disability Overhead Expense policy premiums are tax deductible to the premium payor. Benefits, however, are taxable. Disability Keyperson and Buyout policy premiums are not deductible to premium payors, but benefits are received tax-free.

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Review Questions

Which of the following statements is/are correct with respect to the tax treatment of individually purchased disability income policies?

Premiums are not tax deductible

Benefits are received tax-free

✓Both a and b

Neither a nor b

In which of the following situations would the employer’s payment of disability income insurance policy premiums on policies owned by employees be tax deductible?

A proprietorship’s payment of premiums on the proprietor’s disability policy

A partnership’s payment of premiums on the disability policy owned by a 10% partner

An S corporation’s payment of premiums on the disability policy owned by a 15% stockholder

✓A regular corporation’s payment of premiums on the disability policy owned by its sole stockholder

Carl Walters is a non-owner employee of Williams Paint Company. In which of the following situations would Williams Paint Company’s payment of disability income insurance premiums on a policy owned by Carl be deductible to the company?

If Williams Paint Company is a regular corporation

If Williams Paint Company is a sole proprietorship

If Williams Paint Company is a partnership

✓The form of business organization is irrelevant for tax deductibility

For which of the following organizations would Disability Overhead Expense policy premiums be tax deductible?
I. Robert Wilson, M.D., a sole practitioner II. Gorman & Winslow, a law partnership III. Columbia Foods, Inc., a regular corporation

I & II only

I & III only

II & III only

✓I, II & III

Which of the following is/are correct with respect to the tax treatment of disability keyperson and buyout policies?

Premiums are tax deductible

Benefits are taxable when received

Both a and b

✓Neither a nor b

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Chapter 7 Review Questions