343 / Are benefits received under a personal health insurance policy taxable income?

All kinds of benefits from personal health insurance generally are entirely exempt from income tax. This includes disability income; ( Q 382), dismemberment and sight loss benefits; critical illness benefits;¹ and hospital, surgical, or other medical expense reimbursement. There is no limit on the amount of benefits, including the amount of disability income, that can be received tax-free under personally paid health insurance or under an arrangement having the effect of accident or health insurance.² At least one court has held, however, that the IRC Section 104(a)(3) exclusion is not available where a taxpayer’s claims for insurance benefits were not made in good faith and were not based on a true illness or injury.³

The accidental death benefit under a health insurance policy may be tax-exempt to a beneficiary as death proceeds of life insurance ( Q 65).⁴ Disability benefits received for loss of income or earning capacity under no fault insurance are excludable from gross income.⁵ The exclusion also has been applied to an insured to whom policies were transferred by a professional service corporation in which the insured was the sole stockholder.⁶

Health insurance benefits are tax-exempt if received by the insured and if received by a person having an insurable interest in an insured.⁷