Life & Health Insurance Practice Exam 2025 – Your All-in-One Guide to Exam Success!

The taxation of an employer's paid Group Disability Income primarily hinges on who bears the cost of the premiums. In the scenario where the employee pays premiums from pre-tax dollars, the benefits received during a disability claim would be taxable to the employee. This is because using pre-tax dollars means that the employee did not pay taxes on that income at the time the premiums were deducted, leading to taxation on benefits when they are received.

For the other scenarios:

When the employee is still actively working, the income would not typically be applicable as a disability claim is not in effect. If the employee has exhausted their sick leave, it may have no direct effect on the taxability of a disability income; benefits from short-term disability may be taxable depending on the premium payment structure rather than just the status of sick leave. Lastly, if the employee purchases the policy independently, the benefits would generally be tax-free, as the employee has effectively paid taxes on the income used to purchase that insurance. This highlights the significance of who pays the premiums in determining the tax implications for Disability Income benefits.