Are my Long-Term Disability Benefits Taxable?
All LTD insurance policies indicate the amount of benefits that the policy holder will be entitled to upon becoming unable to work due to a medical condition. This amount will generally be a percentage of the person’s income prior to becoming unable to work. However, the benefit amount outlined in the policy might be subject to tax, meaning the actual payment received by the policy holder will be lower. Whether this is the case depends on who pays the LTD insurance premiums.
Generally, unless the policy holder pays for 100% of the monthly premiums, the benefits payable will be subject to tax. This issue often arises where an individual is covered under an LTD policy for which his or her employer pays all or part of the premiums. For example, a policy holder earning a gross salary of $100,000 a year will net approximately $70,000 a year. In such a case, if the LTD policy provides for a benefit of 70% of pre-disability income, and the policy holder pays the entirety of the premiums, he or she will be able to receive approximately the same amount for benefits compared to the net income prior to disability, being $70,000 a year. On the other hand, however, if the employer pays for part or all of the premiums, the $70,000 will be subject to tax, and the policy holder will earn significantly less than his or her prior net income.
This issue can also arise in the context of litigation, where the insurance company has denied benefits, and the policy holder has either obtained a settlement or a Court has determined that benefits should be paid. Where this occurs, the policy holder may receive a lump sum payment, constituting retroactive payments for LTD benefits from the day in which he or she became eligible, and may seek a lump sum in lieu of future disability payments. Where benefits are subject to tax, any retroactive payment will continue to be subject to tax. However, policy holders may seek an order requesting that the insurance company be responsible for paying all extra income tax payments that arise due to the delay in payment of disability benefits and the resulting lump sum awarded at trial. Where any lump sum payment is made in lieu of future disability payments in the settlement of a claim, the tax status of such payment is non-taxable.
It can be difficult to asses your tax liability regarding LTD benefits, and your rights while making a claim for retroactive payment or future payments. Our firm has extensive expertise in LTD litigation, you may contact us at any time if you require assistance.