Illinois Health Insurance Practice Exam

What is the tax treatment generally for individual expense policies like individual disability income policies?

1. A. Tax-deductible by the employer

2. B. Subject to taxation on both premiums and benefits

3. C. Tax-free with no tax implications

4. D. Tax-deductible by the individual

The correct answer is: C. Tax-free with no tax implications

Individual expense policies, such as individual disability income policies, generally have a tax treatment that leads to tax-free benefits for the insured when the premiums are paid using after-tax dollars. This means that the benefits received during a period of disability are not subject to income tax, as the premiums were paid with post-tax income. Choosing the answer that indicates there are no tax implications for the policy aligns with the understanding that the financial benefits from these policies can provide critical financial support during times of need without further taxation. This tax-free status of benefits is essential for individuals relying on these payouts to manage their living expenses when they cannot work. It’s important to note that the other options suggest different tax treatments that do not apply to most standard individual disability policies.