Are disability insurance benefits taxable?

This is a question that should be answered by a tax advisor. As disability insurance lawyers we are not authorized to give tax advice. The general rule is that if you use post-tax dollars to pay the premiums, then the disability insurance benefits should not be taxable.

Bill Bischoff, recently wrote the following article on this issue for

Disability Insurance: Long-term disability coverage protects you against lost earnings during any lengthy period out of work because of a disability. The catch? Most long-term disability, or LTD, policies limit benefits to 60% or 70% of earnings before income taxes. That’s generally OK as long as you don’t have to pay income taxes. But if you do, you’re probably going to lose 30% to 40% (or more) to federal and state taxes. LTD benefits are generally income-tax-free when you, rather than your employer, pay the premiums. But if your employer pays the premiums as a tax-free fringe, LTD benefits will be fully taxable to you. The same is true if you set aside part of your salary pretax to pay the premiums. If LTD benefits would be taxable because your employer is paying the premiums, the preferred solution is to arrange for the premiums to be paid with aftertax dollars through withholdings from your checks. The other alternative is to buy a supplemental LTD policy. The idea is to buy enough extra coverage to cover the income-tax hit on the benefits that you would receive under the company-provided coverage.

Comments (20)

  • CJ, as your situation has multiple issues it would be best to discuss your claim with you. Please feel free to contact our office to discuss.

    Stephen Jessup Dec 27, 2019  #20

  • Hi. I have read and read many heart felt dilemma so sorry but my issue has not come up. This is ur 2019 and most are very old complaints… why none are current issues. But to get to mine. I was receiving survivor spouse with disable child he is now in his 30ty before my injury at work. I got a lump settlement With a non disclosure no admonish of fault in the workmen comp claim the company did not file the wc and my manager claim I reported it late. I transitioned to Survivors widow benefits @60 prior to being fully approved for SSDI. Cigna has paid me presently up to now but I am approaching my 2 year mark and they are asking me to see their drs stating my dr records are coming in as they requested. A cigna worker called me one night in July stating my old job or her co not sure which was pressuring her to see if I could go back to work or offer if I would accept some vocational rehab. I sense something was wrong with the call and didn’t give her an answer. That person became my worker soon after that call.

    I have not been awarded SSDI yet but I have asked that it be under my deceased husband name so not to affect my Ltd which is near the 2 yr point. If it is erisa governed why should I give it to them? Can I not accept it? Can I state to ssa I want to stay in my widow benefits because it Will equal SSDI amt with the hope I will keep both coming with no $ effects?

    Can I request a lump sum I paid 60% of my Ltd benefits? Also I had an offset with the lump sum amt and The Advocator group had done a background search on me and found this information out and Cigna called and asked me to send the a copy of the document. I decided to do some research on sending out this document since I had a nondisclosure but before I could respond I got a call from them stating they had got a copy of the agreement and the Advocator group that Cigna chosed to represent me sent a release information form the same week in the attempt to cover up this deed… never signed it. Does this breach my NDA?

    CJ Dec 27, 2019  #19

  • Laura, you will need to discuss with your former attorney, or with an accountant/tax professional as it relates to your question.

    Stephen Jessup Mar 5, 2019  #18

  • My LTD Insurance company (Cigna) denied my claim as it was for a psychiatric disability. My lawyer and I fought it and then we accepted a lump sum settlement. A w2 from Cigna was sent to me for the full amount of the settlement. Is that settlement money taxable?

    Laura Mar 5, 2019  #17

  • John, as a general proposition, if your employer pays the total premium and does not include the cost of coverage in your gross income, then your benefits will be taxable. It sounds as though your employer may including the cost of coverage if you are being taxed. I suggest you speak with a tax professional for more guidance.

    Jay Symonds Apr 13, 2018  #16

  • My company provides LTD coverage and pays the premiums. Employees are taxed on the value of that premium. In this case, is the benefit considered taxable income for the employee?

    John S. Apr 12, 2018  #15

  • Tony, if it is a non-taxable benefit then there likely will not be any 1099 issued. You can also contact your carrier to confirm.

    Stephen Jessup Feb 1, 2017  #14

  • Hello,

    I paid for my life insurance benefit with after tax dollars so the payments should not be taxable. At tax time, will I receive a form from the insurance company similar to SSA1099 or no form since there is no taxable income?


    Tony Jan 30, 2017  #13

  • Sharon, the settlement proceeds should follow the same taxation (or lack thereof) as your monthly disability benefits do. I would also recommend you consult with an accountant or tax professional. Also, if you would like us to review the buyout offer from your carrier to determine the sufficiency of same please feel free to contact our office.

    Stephen Jessup Dec 20, 2016  #12

  • Hi my question is I receive benefits for LTD and have since 2006. They’ve offered to buy me out and be done with them. Premiums were paid by me, after tax – is the lump sum taxable income? Thanks!

    Sharon Dec 19, 2016  #11

  • Linda, as we are not tax professionals I would urge you to speak with an accountant or other qualified tax professional.

    Stephen Jessup Nov 15, 2016  #10

  • I received approximately 227,000 as a lump sum settlement payment on an ERISA LTD plan from my former emplyer. This payment was distributed into my checking account with only 3 weeks notice of plan termination/receipt of money. The plan premiums were paid for by employer with the exception of a small pretax portion I paid to increase payment from 60 to 70%. No options were provided for rollovers or tax savings options on the distribution. Are are there any options available for reducing tax liability of receiving this in a single year? I turned 65 five days after receiving funds. Also if these funds are fully taxable and the remaining balance is invested in an annuity, would the withdrawals also be taxed??

    Linda Nov 12, 2016  #9

  • Deborah, you can contact MetLife to adjust how much they are taxing your benefit for. Carriers typically just leave a number in place until advised that an insured wants the tax withholdings adjusted.

    Stephen Jessup Oct 27, 2016  #8

  • After receiving my primary SS benefits and a lump sum from my retirement Met Life sent me letter saying my LTD would be reduced to $262 a month. I understand that, but each month I get a benefit summary from them for gross payment $2,376 and $112 tax withheld. Am I being taxed for benefits they are not paying me? Is this right, makes no sense to me.

    Deborah dial Oct 23, 2016  #7

  • Sharon, Earned Income should be specifically defined in your policy.

    Stephen Jessup Jun 21, 2016  #6

  • I’m receiving LTD through Met Life disability.. Will I have to report any winnings from a Casino, or lottery??
    Is it considered “Earned Income”??

    Sharon Jun 18, 2016  #5

  • Ray, the SSA may inquire as to the nature of the money. However if your benefit has been tax free the settlement would typically follow suit. As we are not tax professionals I highly recommend you also consult with an accountant or tax professional for further clarification.

    Stephen Jessup Jun 13, 2016  #4

  • I receive disability from a insurance company each month tax free and now they want to pay me a lump sum will that still be tax free and also I receive social security disability too. will I have to report any of this to the social security dept. or put it on my tax from when I file at end of year.

    Ray Jun 9, 2016  #3

  • Hello. I have a LTD ERISA claim that was paid for two years, then denied. However, the insurance company (Reliance Standard) is now trying to negotiate a buy-out of my remaining claim. The policy was provided by my former employer as part of compensation and benefits package where they paid at least a portion of the premium, however, I also paid a portion of the premium to increase my benefit amount. This was done using post-tax dollars and was automatically withdrawn from my paycheck until I went on disability at which time I began sending my employer a check to cover the health and insurance premiums. My question is if we reach a settlement, will the buy-out be taxable and if so, how will it be taxed and at what rate?

    California Mar 19, 2014  #2

  • California,

    You will need to speak with an Accountant or other qualified tax professional with respect to your tax questions. That being said, is Reliance Standard offering you the lump sum buyout in lieu of your pursuing legal recourse or did you successfully appeal the claim and now they are looking to buy out the policy? Before signing any documents I would suggest you consult with an attorney to discuss what legal rights you may be waiving by settling the claim.

    Stephen Jessup Mar 4, 2014  #1

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