Disability Income✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
How does the tax treatment of disability income benefits depend on who paid the premiums?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The tax treatment of disability benefits follows the premium source: if the insured paid the premiums with after-tax dollars (individual policy), benefits are received tax-free. If the employer paid the premiums (group policy paid by employer), benefits are taxable as income to the employee. If premiums were split, the benefit is partially taxable in proportion to the employer's share.
Why the other options are wrong
- B) Employer-paid benefits are taxable; tax-free treatment is not universal.
- C) Individually paid premiums produce tax-free benefits, so benefits are not always taxable.
- D) The tax treatment depends on who paid the premium, not on whether benefits are paid in a lump sum or installments.
Memory hook
Who paid the premium decides the tax. Your own after-tax dollars = tax-free check. Employer's dollars = taxable paycheck.