Illinois Health Insurance Practice Exam

For individual disability income policies, what is the usual tax treatment for premiums paid by an individual?

1. A. Eligible for tax deductions

2. B. Tax-free and non-deductible

3. C. Non-qualified for tax deductions

4. D. Tax-deductible under certain conditions

The correct answer is: C. Non-qualified for tax deductions

For individual disability income policies, the usual tax treatment for premiums paid by an individual is that they are not eligible for tax deductions. This means that individuals cannot deduct the cost of their disability income insurance premiums on their tax returns. When premiums are paid for a disability income policy, those premiums are considered personal expenses and are not tax-deductible. However, benefits received from a disability income policy are generally tax-free, provided that the premiums were paid with after-tax dollars. This tax treatment is designed to ensure that individuals receive benefits without tax implications, reflecting the notion that they have already paid taxes on the income used to purchase the policy. Understanding the correct tax treatment of individual disability income premiums is crucial for individuals to effectively plan their finances and understand the benefits they are entitled to.