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1. General Insurance Concepts
2. Producer Roles and Receipt Types
3. Underwriting
4. Health Insurance Basics
5. Required Policy Provisions
6. Optional Policy Provisions
7. Medical Expense Insurance
8. Group Health Insurance
9. Disability Income Insurance
10. Accidental Death and Dismemberment Insurance
11. Long Term Care Insurance
12. Dental Insurance
13. Section 125 Plans and Limited Policies
14. Federal Government Programs
15. Medigap and Medicaid
16. Health Insurance Taxation
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16. Health Insurance Taxation
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Health Insurance Taxation

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Individual Policies

Generally, premiums paid to fund individual health insurance policies are not tax deductible. There are 2 exceptions:

  1. If the sum of premiums paid for medical expense insurance, premiums paid for LTC insurance, and out-of-pocket medical expenses exceeds 7.5% of one’s adjusted gross income (AGI), they are deductible only to the extent that they exceed 7.5% of AGI.
  2. Sole proprietors and partners in business can deduct the full amount paid (100% of the premiums) for all types of health insurance for themselves, their spouses, and dependent children.

Health insurance benefit payments, including disability income benefits received from an individual policy, are tax-free.

Business Policies

A company cannot deduct the premiums paid for key person, executive bonus insurance, or insurance purchased on the lives of the business owners to fund a buy/sell agreement or disability buy-out, but can exclude any benefits received from its gross taxable income.

If a disabled partner receives more from a disability income insurance policy than is required to fund a buy-sell agreement, the excess is taxable as ordinary income to the disabled partner.

Business overhead expense insurance is deductible as a business expense and benefits received are tax-free.

Premiums paid to fund group health insurance plans are tax-deductible by the employer. Generally, employees covered under a group health plan are not taxed on benefits received from group insurance. There is one exception:

Disability income payments received by an employee from an employer-paid group disability income policy are included in the employee’s gross taxable income, that is to say the benefit is taxable.

Note: If the employer offers contributory group disability insurance, only the portion (percentage-wise) paid by the employer is taxable. The logic behind this is that the employer’s portion of the premium is tax deductible (pre-tax), while the employee pays their portion of the premium with money that has already been taxed.

Here’s an example showing how disability income insurance benefits from an employer-sponsored group policy would be taxed when the employee pays 30% of the premium:

Total monthly premium for the disability insurance: $100

Employee pays 30%, or $30/month, using after-tax dollars

Employer pays 70%, or $70/month

The employee becomes disabled and starts receiving $3,000/month in disability benefits

The taxability of the benefits depends on who paid the premium and whether it was paid with pre-tax or after-tax dollars:

Employer-paid portion (70%): Taxable

Employee-paid portion (30%) with after-tax dollars: Not taxable

How to Calculate the Taxable Portion: Since the employer paid 70% of the premium, 70% of the monthly disability benefit is taxable, and 30% is tax-free.

Taxable amount: 70% of $3,000 = $2,100

Tax-free amount: 30% of $3,000 = $900

The employee would pay income tax on $2,100/month, and $900/month would be received tax-free.

Lesson Summary

When it comes to health insurance, there are tax considerations to keep in mind:

  • Premiums paid for individual health insurance policies are usually not tax deductible.
  • Exceptions to this rule are:
    • If the sum of certain medical expenses exceeds 7.5% of one’s adjusted gross income (AGI), they are deductible beyond that threshold.
    • Sole proprietors and business partners can deduct 100% of health insurance premiums for themselves, their spouses, and dependent children.
  • Health insurance benefit payments, including those from individual policies, are typically tax-free.

Regarding business policies:

  • A company cannot deduct premiums for certain insurances but can exclude benefits from taxable income.
  • Business overhead expense insurance is both deductible and benefits received are tax-free.
  • Group health insurance plans provide tax benefits:
    • Employers can deduct premiums paid.
    • Employees covered under a group health plan are usually not taxed on benefits received.
    • An exception exists for disability income payments from employer-paid group disability plans, which are taxable to the employee.

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