AD Banker Comprehensive Practice Exam

In relation to employer-sponsored group disability income insurance, what describes the general tax rules?

1. Premiums are not deductible, the benefits are taxable

2. Premiums are deductible, the benefits are taxable

3. Premiums are deductible, the benefits are not taxable

4. Premiums are not deductible, the benefits are not taxable

The correct answer is: Premiums are deductible, the benefits are taxable

In the context of employer-sponsored group disability income insurance, the fundamental tax rules state that if an employer pays the premiums for the disability insurance policy, employees receiving the benefits from that policy will typically have to pay income tax on those benefits. This occurs because the premiums paid by the employer are generally not taxable to the employee as income when they are paid, but the benefits received are considered taxable income to the employee when they are collected. One of the key points in understanding this is that since the employer is the one contributing to the policy premiums, the benefits function like wages: they are taxable income. This delineation is important for employees to understand their tax liabilities when they access those benefits in the event of a disability. Thus, the combination of premiums being deductible for the employer (making the benefits taxable to the employee) accurately reflects the general tax implications associated with employer-sponsored group disability income insurance.