How are benefit payments from individually-owned medical expense policies treated for tax purposes?

Benefit payments from individually-owned medical expense policies are generally exempt from income taxes. This means that when a policyholder receives payouts for medical expenses under their individually-owned health insurance policy, those payments are not subject to federal income tax. The rationale behind this tax treatment is to encourage individuals to maintain health insurance coverage and to alleviate the financial burden of medical expenses.

This favorable tax status is in place because the premiums paid for these policies are usually made with after-tax dollars, providing an incentive for individuals to seek necessary medical care without the added concern of tax implications on the benefits received. As a result, the benefits help cover healthcare costs without affecting the policyholder's taxable income, ultimately supporting access to healthcare services.