Disability insurance premiums—the monthly or yearly fees for your insurance policy—are intended to be affordable. After all, you buy it to protect your income in case an accident or sickness renders you unable to work.
But what if you can take that security further by finding more ways to save, like deducting those premiums from your income taxes? Wouldn’t that make disability insurance that much more attractive?
But not all premiums are deductible. In this post, we explore situations where you can get a tax deduction for the cost of disability insurance.
What Is Long-Term Disability Insurance?
In exchange for disability insurance premiums that you pay to the insurance company, it will pay you a monthly benefit if you can’t work because of an injury or illness. Once you are disabled for 90 days, you can receive monthly disability benefits from your insurance policy.
These payments last until you recover or until age 65, whichever occurs first. However, some policies only pay for two or five years, so you’ll want to double-check your insurance plan to make sure you have the best personal disability policy.
Without question, disability insurance protects your income so you can focus on getting better. If you become disabled, you can use the insurance payout to maintain your lifestyle. It takes away the stress of worrying about paying your bills while you can’t work.
As you can see, disability insurance is a must-have. But can you get a tax break if you buy it?
Can You Claim Disability Insurance Premiums On Your Taxes?
There are many types of disability insurance. For example, you could have an individual or group insurance plan. You may also be an employer who provides disability benefits for your employees.
Whatever the case, the tax implications for disability insurance depend on the type of disability insurance you have.
Let’s get into the tax treatment of each type below.
Are individual long-term disability premiums tax-deductible?
The coverage you get through an employer-paid plan may not be good enough to protect your income fully. For example, the monthly benefit may not be enough, or the definition of disability may be weak.
To remedy the issue, you can buy disability insurance with your own personal policy. This allows you to customize the coverage so that it fits your needs.
Because the income tax act considers it a personal expense, you can’t write off disability insurance premiums for tax purposes. It’s the same tax treatment as life insurance premiums. They also don’t qualify for the medical expense tax credit, unlike health and dental insurance premiums.
On the plus side, because you pay for disability insurance coverage with after-tax dollars, you will receive disability insurance benefits tax-free. Again, this is like with life insurance, where the death benefit is tax-free.
Can you deduct the disability insurance premiums as a business expense if you are self-employed?
One of the most important things you can do to protect your income is to buy a personal disability policy. That’s because self-employed workers don’t have the luxury of a group insurance plan. Therefore, the only way to get long-term disability is with a private disability insurance plan.
The income tax act treats a self-employed disability policy the same as individual disability coverage for tax purposes. Therefore, the insurance premiums don’t qualify for a tax deduction.
Can a corporation claim group disability insurance premiums as a tax deduction?
When an employer pays for disability coverage for its employees, it’s called a group disability insurance plan. Small business owners often offer this as part of a benefits package. It usually includes life insurance, health insurance, and sometimes even critical illness insurance.
These are business expenses used to retain and reward employees, much like the salary employees receive. As a result, employers can get tax deductions for the insurance premiums paid for all of these. While the company receives a tax break, any disability benefit an employee receives will be considered taxable income.
With some companies, employees pay for a part or all of the disability insurance coverage. In these situations, the business expense is only partially deductible up to the amount the business paid. In return, the employee receives the long-term disability benefits tax-free up the amount they paid. The remaining amount is included in the employee’s income on their tax return.
For example, say you paid $1,000 into the plan for the year and received $30,000 in benefits on a claim. $1,000 of that will be tax-free, while the remaining $29,000 will be considered taxable income.
What if you name yourself as the beneficiary on a corporate-owned disability policy?
Wouldn’t it be great if you can deduct the premiums on a corporate-owned policy while receiving the benefits personally tax-free?
Not so fast. When your corporation pays for something that you benefit from personally, the Income Tax Act considers it a shareholder benefit. Not only are shareholder benefits not tax-deductible, they are taxable to the shareholder on their personal tax return.
Because of the double taxation, you should avoid naming yourself as the beneficiary of a corporate-owned disability insurance policy.
Are other types of disability insurance tax-deductible for corporations?
Small business owners can also buy disability insurance to protect the company itself. For example, it can get disability coverage on a key person who is vital to the company’s success. This would protect the corporation from the potential loss that the key person’s disability would cause.
In a partnership, the corporation can also get an insurance policy as part of a buy-sell agreement. If one partner becomes disabled, the other can purchase their shares with the insurance payout.
In either case, the income tax act does not consider either of these as a deductible expense. As a result, the corporation can’t deduct disability insurance premiums for key person and buy-sell disability insurance. On a positive note, the company receives the disability benefits tax-free.
Another type of corporate-owned disability insurance is called wage loss replacement plans. A WLRP groups several individual disability insurance policies under the employer to provide better disability benefits than group disability insurance. Unlike other types of corporate-owned disability insurance, premiums for WLRPs are tax-deductible.
Can you write off business overhead expenses insurance?
As you know, business expenses continue even if you become disabled. To keep the business running, you still need to pay employees’ salaries, rent, property tax, utilities, and other costs. But the revenue stops because you can’t work.
That’s why you need a business overhead expenses insurance policy. It reimburses you for business expenses while you are disabled. Covering these recurring expenses for up to two years ensures your business will continue should a disability occur.
Business overhead insurance is essential for principals of small businesses where their ability to survive largely depends on the owners working—for example, dentists, physicians, accountants, lawyers, engineers, realtors, and more.
While the disability insurance benefits are considered taxable income, the premiums paid are a tax-deductible expense.
Are Your Insurance Premiums Tax-Deductible?
The first step in determining whether your premium payments are deductible expenses is to find out the type of disability policy you have. If it is an individual or self-employed plan, you can’t claim a tax deduction.
However, it may be more challenging to establish the tax implications of the premium payments for corporate-owned disability insurance.
Here is a handy table showing the tax treatment of different types of disability insurance:
Type | Tax-deductible? |
|---|---|
Individual policy | No |
Self-employed disability insurance | No |
Group long-term disability insurance (employer-paid) | Yes |
Group long-term disability insurance (premiums split between employer and employee) | Yes, up to the amount paid by the employer. The remaining is not tax-deductible. |
Key person disability insurance | No |
Buy-sell disability insurance | No |
Wage loss replacement plan | Yes |
Business overhead expense | Yes |
Get Help With Your Disability Insurance Tax Questions
Finding out whether disability insurance premiums are deductible expenses can be a time-consuming task. In some situations, they are tax-deductible, while they don’t qualify for the tax deduction in others.
For this reason, it’s always a good idea to consult with a tax professional before you apply any deductions to your income taxes.
Call us today at 604-928-1628 or email us at info@briansoinsurance.com today for your free long-term disability insurance quote. We can match you with a leading insurance company that provides the best disability coverage.
While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
