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14.4 Federal Tax Considerations for Personally-Owned Health Insurance Policies

Disability Income Insurance​

  • Premiums paid for individual disability income insurance are not tax-deductible for federal income tax purposes.
  • Disability income benefits received from such policies are generally not subject to taxation.

Medical Expense Insurance​

  • Premiums and unreimbursed medical expenses may be tax-deductible to the extent that they exceed 7.5% of an individual’s adjusted gross income (AGI).
  • Benefits received from medical expense coverage are generally not considered taxable income.

Long-Term Care Insurance​

  • Long-term care (LTC) insurance premiums may be included as part of the medical expense deduction, subject to age-based limits established by the IRS.
  • Unreimbursed expenses for long-term care services (excluding premiums) may be tax-deductible to the extent they exceed 7.5% of an individual’s adjusted gross income (AGI).
  • Benefits received from a qualified long-term care insurance policy are generally not taxable.

Quiz​

1. How are premiums for individual disability income insurance treated for federal income tax purposes?

A. Fully tax-deductible

B. Partially tax-deductible

C. Not tax-deductible

D. Tax-deductible only if employer-paid

Correct Answer: C

Rationale: Premiums for individual disability income insurance are not tax-deductible under federal tax rules.

2. How are disability income benefits from an individual policy typically taxed?

A. Fully taxable

B. Partially taxable

C. Tax-free

D. Taxable only if over a certain amount

Correct Answer: C

Rationale: Benefits received from individual disability income policies are generally not subject to taxation.

3. When can medical expenses be deducted for tax purposes?

A. When they exceed 5% of AGI

B. When they exceed 7.5% of AGI

C. When they exceed 10% of AGI

D. They are never deductible

Correct Answer: B

Rationale: Medical expenses, including premiums and unreimbursed costs, are deductible only to the extent they exceed 7.5% of an individual’s AGI.

4. How are benefits from medical expense insurance generally treated for tax purposes?

A. Fully taxable

B. Partially taxable

C. Not taxable

D. Taxable only if employer-paid

Correct Answer: C

Rationale: Benefits received from medical expense insurance are generally not considered taxable income.

5. Which statement best describes the tax treatment of long-term care (LTC) insurance?

A. LTC premiums are always fully deductible with no limits

B. LTC benefits are always taxable

C. LTC premiums may be deductible subject to age limits, and benefits are generally not taxable

D. LTC expenses are never deductible

Correct Answer: C

Rationale: LTC premiums can be included in medical expense deductions within IRS age-based limits, and benefits from qualified plans are generally not taxable.