227 / Are life insurance premiums that have been waived because of the insured’s disability taxable income to the insured?

No. When waived, the premiums are exempt as “amounts received through accident or health insurance … for personal injuries or sickness.”¹ However, the Tax Court seems to have indicated that they are not constructively received by the insured. Although not directly addressed in the case, apparently the waived premiums would also not be taxable to the insured since they were not constructively received by the insured.²

Note that because premiums paid for a supplementary benefit such as a waiver of a premium must be excluded from premium cost ( Q 531), a policy on which premiums have been waived for a period of years would have a lower cost basis than a similar policy where the taxpayer paid the premiums.

1.     IRC § 104(a)(3).