Under an individual disability income insurance policy owned by ABC Corporation, how are benefits treated for tax purposes?

Under an individual disability income insurance policy owned by a corporation, the treatment of benefits for tax purposes is specific. When the corporation pays the premiums for the policy, those benefits, when paid out as a result of a claim, are received tax-free by the company itself.

This scenario typically applies when the corporation is the policy owner and the beneficiary, which means that if a key employee becomes disabled and claims benefits, the payments made by the insurance company to the corporation are not subject to income tax. This tax treatment is appealing for businesses, as it can provide a valuable source of funding for ongoing company expenses during the employee's absence due to disability.

In contrast, if the employee had personally purchased the policy and was receiving benefits directly, those benefits could be taxable depending on how the premiums were paid and if any personal tax deductions were taken. Therefore, understanding the nuances of tax treatment in business-owned disability income policies provides essential insight into strategic financial planning for both the corporation and its employees.