Is Disability Insurance Tax Deductible?

Disability insurance is a critical part of any financial plan because it protects your ability to earn an income, which is one of your most valuable assets. If you’re injured or sick and can’t work for several weeks or more, disability insurance will help you make up lost income. It’s such a critical part of your financial plan because it allows you to keep paying for the essentials while also saving for future goals, such as retirement.

A frequent question about disability insurance is: Are disability insurance premiums tax deductible? In most cases, disability insurance premiums are not tax deductible — but there’s more to this story. Here’s a little more about how it works.

Can you deduct disability insurance premiums?

In many cases, you’ll have a mix of pre- and post-tax disability insurance coverage. Pre-tax disability insurance will likely come through your employer’s group plan (offered to everyone) while post-tax disability insurance is usually something you’ll buy on your own.

The tax treatment of your disability insurance premiums is an important planning consideration as it will impact whether you will owe taxes on your benefit, should you ever become disabled. A financial advisor can show you how disability insurance fits into your larger financial plan and help you anticipate the tax impact on various parts of your plan.

Pre-tax premiums on employer disability insurance makes benefits taxable

Many employers offer group disability insurance as part of your benefits package. In some cases, the premium for these plans can be paid with pre-tax dollars. This sounds like a good deal because you won’t owe taxes now on a work benefit. But if you ever need to collect your benefit, you will owe taxes on the money you receive. That means you won’t take home the entire face value of your benefit. Instead, a benefit that covers 60 percent of your income might leave you with only 40 to 50 percent of your income after taxes (or less, depending on your tax bracket).

There are also cases where you may be able to purchase additional disability coverage through your work with after-tax dollars. In that case, your benefit would be tax- free.

Disability insurance premiums for private disability insurance are not tax deductible

If you aren’t offered disability insurance through your work, or if you’re looking to supplement a work plan that only covers a portion of your salary, you can buy private coverage on your own. Like life insurance or car insurance, you can’t deduct the premiums you pay for private disability coverage. But, because you’re paying for private coverage with post-tax dollars, your benefit will be tax- free if you ever need it.

Can you deduct disability premiums if you’re self-employed, and are the benefits taxable?

Typically, if you’re a business owner and your company is paying disability insurance premiums on behalf of your employees, you can deduct the premiums as a business expense for your company. However, any benefits paid out to the employee would be taxable for the employee. It’s important to consult a tax advisor, however, on the deductibility of premiums as a business owner because it can get complicated quickly.

Is Social Security disability taxable?

You might owe taxes on your Social Security disability benefits if you have other sources of income that push you within certain IRS-specified income ranges. Even then, you’ll likely only be taxed on a maximum of 85 percent of your benefits.

Why it may make sense to have a mix of group and private disability insurance

Ultimately, if you’re trying to decide whether it makes sense to keep only your company’s group disability insurance or add your own private disability insurance, consider what your situation would be if you were to become disabled. Benefits that are taxed from a company disability insurance policy might be less than you may need to feel financially protected, so you might opt for both group and private disability insurance. It’s important to discuss this with a financial advisor to see what makes sense for your situation.

To be used with form MN 992-STD, MN 992-LTD, MN 1096 SGSTD, MN 1096 SGLTD, ICC16.TT.DI.IIB.(0916), ICC16.TT.DI.FIB.(0916), ICC16.TT.DI.CAT.(0916), ICC16.TT.NCDI.(0916), ICC16.TT.GRDI.(0916), ICC16.TT.DI.PDB.(0916), ICC16.TT.DI.PDBO.(0916) or state equivalent. Not all contracts and optional benefits are available in all states. Disability insurance policies contain some features and benefits that may not be available in all states. The ability to perform the substantial and material duties of your occupation is only one of the factors that determine eligibility for disability benefits. These policies also contain exclusions, limitations and reduction-of-benefits provisions. Eligibility for disability income insurance, additional policy benefits, and qualification for benefits, is determined on a case-by-case basis. For costs and complete details of coverage, contact your Northwestern Mutual Financial Representative. Disability insurance policies contain exclusions and limitations that could affect individual coverage. For costs and more complete details, consult a Northwestern Mutual financial representative.

Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life insurance, disability insurance, annuities, and life insurance with long-term care benefits)

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