New Jersey Life and Health State Practice Exam

Under what condition are group disability benefits considered tax-free to the insured?

1. When the employer pays the premiums

2. When the recipient pays the premiums

3. When no claims are made

4. When the benefits are paid directly to the hospital

The correct answer is: When the recipient pays the premiums

Group disability benefits are considered tax-free to the insured when the recipient pays the premiums. This is due to the IRS guidelines that state if an employee pays for the disability insurance premium out of their pocket with after-tax dollars, any benefits received from that policy will not be subject to income tax. In contrast, if the employer pays for the premiums, the benefits received may be taxable, as the employer contributions were made with pre-tax dollars. This taxation principle applies to many group insurance benefits and highlights the difference between how premiums are handled between employer-paid and employee-paid plans. Receiving benefits without making contributions, as in scenarios where no claims are made or when benefits are paid directly to a hospital, does not affect the tax status of the benefits concerning the insured. Thus, the key factor that determines the tax-free status of group disability benefits is whether the insured pays the premiums themselves.