Individual Policies Generally, premiums paid to fund individual health insurance policies are not tax-deductible, there are 2 exceptions:

1. If the sum of premiums paid for medical expense insurance, premiums paid for LTC insurance and out of pocket medical expenses exceed 7.5% of one’s adjusted gross income (AGI), they are deductible only to the extent that they exceed 7.5% of AGI. 2. Sole proprietors and partners in business can deduct the full amount paid (100% of the premiums) for all types of health insurance for themselves, their spouses and dependent children. Benefits received by partners from a medical policy provided by the partnership are NOT taxable.

HSA, MSA, and FSA are accounts used to pay for certain "qualified" expenses with pre-tax dollars. Contributions to these accounts are tax deductible. Health insurance benefit payments, including disability income benefits received from an individual policy, are tax-free.

Business Policies Premiums paid for business overhead expense insurance is deductible as a business expense and benefits received from business overhead expense insurance are received tax free.

A company cannot deduct the premiums paid for key person, executive bonus insurance or insurance purchased on the lives of the business owners to fund a buy/sell agreement or disability buy-out, but can exclude any benefits received from its gross taxable income. Benefits paid to a disabled partner in excess of amounts required to fund a disability buyout agreement, or the disabled partner's cost basis in the business are taxable to the disabled partner as a capital gain.

Premiums paid to fund group health insurance plans are tax-deductible by the employer; and generally, employees covered under a group health plan are not taxed on benefits received from group insurance, there is one exception: Disability income payments received by an employee from an employer-paid group disability income policy are included in the employee’s gross taxable income.

If the employer pays a portion (and the employee pays a portion) of the premium for disability income insurance that is part of a company sponsored group benefit plan, the taxation of the benefit is determined by the split. The IRS says, percentage wise, the portion of the benefit attributable to the employee’s premium contribution will be received tax free. The portion of the benefit attributable to the employer's premium contribution will be taxable as ordinary income.