Planning for a Family Member with a Chronic Illness: Insurance Payments
Today, I will discuss the receipt of insurance payments by someone who is suffering from a chronic illness and whether or not they are subject to the income tax. Payments received under a disability insurance policy are income tax free if the policy premiums were paid by the insured personally and not paid by their employer. Further, long term care insurance payments are generally tax free as well except for policies that have dividends that are paid. The dividends portion is taxable.
Finally, the proceeds from life insurance are income tax free. However, newer policies allow you to borrow against the death benefit prior to death. The amount borrowed is generally income tax free if the client is terminally or chronically ill. However, the definition of "chronically ill" is defined under the IRS rules as: 1) being unable to perform (without substantial help) at least 2 activities of daily living (eating, going to the bathroom, bathing, dressing, etc) for a period of 90 days or more due to loss of functional capacity or 2) requiring substantial supervision to protect from threats to health and safety due to severe cognitive impairment. If you do not fit within the IRS's definition of chronically ill, the borrowed proceeds may be income taxable.
To learn more about planning for family members with a chronic illness, please contact the Jacksonville and Ponte Vedra Beach law firm of Wood, Atter & Wolf, P.A.
