AD Banker Comprehensive Practice Exam

What statement is true concerning the income received from an individually owned disability income policy?

1. Premiums paid with after tax dollars, Income benefit taxable

2. Premiums are tax sheltered, Income benefit taxable

3. Premiums are tax sheltered, Income benefit not taxable

4. Premiums paid with after tax dollars, Income benefit not taxable

The correct answer is: Premiums paid with after tax dollars, Income benefit not taxable

The statement regarding an individually owned disability income policy is accurate when it indicates that premiums are paid with after-tax dollars and that the income benefit is not taxable. Individual disability income insurance policies are typically purchased with money that has already been taxed, meaning that the policyholder does not receive a tax deduction for the premiums paid. As a result, when benefits are paid out due to a qualifying disability, those benefits are received tax-free. This structure is designed to provide a financial benefit to the policyholder without the burden of additional tax obligations on the income they receive while unable to work due to their disability. This principle of tax-free benefits is a key reason many individuals opt for personal disability insurance policies to safeguard their income against unforeseen circumstances.