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

Medical expense reimbursement benefits must be taken into account in computing a taxpayer’s medical expense deduction. Because only unreimbursed expenses are deductible, the total amount of medical expenses paid during a taxable year must be reduced by the total amount of reimbursements received in that taxable year.⁸

Likewise, if medical expenses are deducted in the year they are paid and then reimbursed in a later year, the taxpayer or the taxpayer’s estate, where the deduction is taken on the decedent’s final return but later reimbursed to the taxpayer’s estate, must include the reimbursement, to the extent of the prior year’s deduction, in gross income for the later year.⁹

Where the value of a decedent’s right to reimbursement proceeds, which is income in respect of a decedent,¹⁰ is included in the decedent’s estate ( Q 424), an income tax deduction is available for the portion of estate tax attributable to such value.

Disability income is not treated as reimbursement for medical expenses and, therefore, does not offset such expenses.¹¹

Example: Mr. Jones, whose adjusted gross income for 2024 was $25,000, paid $3,000 in medical expenses during that year. On his 2024 return, he took a medical expense deduction of $1,125 [$3,000 – $1,875 (7.5 percent of his adjusted gross income)]. In 2025, Mr. Jones receives the following benefits from his health insurance: disability income, $1,200; reimbursement for 2024 doctor and hospital bills, $400. He must report $400 as taxable income on his 2025 return. Had Mr. Jones received the reimbursement in 2024, his medical expense deduction for that year would have been limited to $725 ($3,000 – $400 [reimbursement] – $1,875 [7.5 percent of adjusted gross income]). Otherwise, he would have received the entire amount of insurance benefits, including the medical expense reimbursement, tax-free.

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Planning Point: This example illustrates that the timing of medical expense payments and their submission for reimbursement may be critical to the individual’s personal tax planning, particularly in regard to reaching the requisite 7.5 percent of adjusted gross income threshold.

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