Disability Provisions Under Life Policies

<div class="Section1">No.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 213(d)(1).<br /> <br /> </div>

<div class="Section1"><br /> <br /> No. When waived, the premiums are exempt as &ldquo;amounts received through accident or health insurance &hellip; for personal injuries or sickness.&rdquo;<a href="#_ftn1" name="_ftnref1">¹</a> 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.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Note that because premiums paid for a supplementary benefit such as a waiver of a premium must be excluded from premium cost ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="531">531</a>), 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.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;104(a)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Estate of Wong Wing Non v. Commissioner</em>, 18 TC 205 (1952).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Where the employee is a designated payee of the disability income, the tax consequences are uncertain. However, it would seem that the disability rider should be treated as accident and health insurance, separable from the life insurance, and that the results would be as follows: the corporation could deduct, as a business expense, the premiums paid for the disability income coverage;<a href="#_ftn1" name="_ftnref1">¹</a> the premiums would not be taxable to the key person;<a href="#_ftn2" name="_ftnref2">²</a> and the disability income would be taxable to the key person.<a href="#_ftn3" name="_ftnref3">³</a> A tax credit may be available to the key person.<br /> <br /> If the disability income is payable to the corporation, the corporation cannot deduct the premium payments,<a href="#_ftn4" name="_ftnref4">⁴</a> but the disability income is tax-exempt to the corporation.<a href="#_ftn5" name="_ftnref5">⁵</a> If the corporation uses the disability income to make disability retirement payments to the key person, it would seem that the corporation could deduct the payments as a compensation expense. The payments would be taxable to the key person,<a href="#_ftn6" name="_ftnref6">⁶</a> but the key person might be eligible for a tax credit.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 162(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 106(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     IRC § 104(a)(3).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     IRC § 265(a)(1).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.     IRC § 104(a)(3); <em>Castner Garage, Ltd. v. Commissioner</em>, 43 BTA 1 (1940); <em>Rugby Prod. Ltd. v. Commissioner</em>, 100 TC 531 (1993); Rev. Rul. 66-262, 1966-2 CB 105.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.     IRC § 104(a)(3).<br /> <br /> </div>

<div class="Section1">No. Benefits received under a disability rider are tax-exempt as “amounts received through accident or health insurance … for personal injuries or sickness.” There is no limit on the amount of disability income that can be received tax-free.<a href="#_ftn1" name="_ftnref1">¹</a> Benefits are exempt whether received by the insured, or by a person or corporation having an insurable interest in the insured.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 104(a)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>Castner Garage, Ltd. v. Commissioner</em>, 43 BTA 1 (1940).<br /> <br /> </div>