8801 / Are benefits received under a personal health insurance policy taxable income?

No. All kinds of benefits from personal health insurance generally are entirely exempt from income tax. This exemption applies to disability income, dismemberment and sight loss benefits, critical illness benefits,¹ and hospital, surgical, and other medical expense reimbursement. The taxpayer is not limited as to the amount of benefits, including the amount of disability income that he or she can receive tax-free under personally paid health insurance or under an arrangement having the effect of accident or health insurance.² However, courts have held that the IRC Section 104(a)(3) exclusion will be denied 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

If a health insurance policy provides for accidental death benefits, the proceeds of these death benefits may be tax-exempt to the policy beneficiary as death proceeds of life insurance.⁴ A taxpayer may exclude from gross income disability benefits received for loss of income or earning capacity under no fault insurance.⁵ The exclusion also has been applied where the policies were provided to the insured taxpayer by a professional service corporation in which the insured was the sole stockholder.⁶

Health insurance benefits are also tax-exempt if received by a person who has an insurable interest in the individual insured by the policy, rather than by that individual himself.⁷

Medical expense reimbursement benefits will impact the amount that a taxpayer is allowed to deduct for medical expenses. 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

Similarly, if the taxpayer deducts medical expenses in the year they are paid and then receives reimbursement 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, 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: Ryan, whose adjusted gross income for 2024 was $25,000, paid $4,000 in medical expenses during that year. On his 2024 return, he deducted medical expenses totaling $2,125 [$4,000 – $1,875 (7.5 percent of his adjusted gross income)]. In 2025, Ryan receives the following benefits from his health insurance: disability income of $1,200 and reimbursement for 2024 doctor and hospital bills of $400. He must report $400 as taxable income on his 2025 return. Had Ryan received the reimbursement in 2024, his medical expense deduction for that year would have been limited to $1,725 (4,000 – $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.