One of the most common questions top earning professionals like physicians and CRNA nurses ask when they buy disability insurance is whether their premiums are tax deductible as a business expense.
Disability Insurance and IRS Rules on Deductibility
The IRS does allow self-employed individuals to deduct disability insurance premiums as a business expense under IRS Publication 535. However, doing so comes with a significant trade-off: any benefits received under the policy become taxable income during a claim.
In contrast, if premiums are paid with after-tax dollars, and not deducted, the disability benefits are received tax-free under Internal Revenue Code Section 104(a)(3).
Disability insurance is designed to replace lost income when a person can no longer work due to illness or injury. When benefits become taxable, the total after-tax amount available each month can drop significantly, undermining the purpose of the buying coverage in the first place.
This tax treatment is especially relevant for doctors seeking specialty-specific disability insurance, or for those evaluating residency disability insurance options early in their careers.
Tax professionals, including the American Institute of CPAs (AICPA), advise that the long-term value of receiving benefits tax-free often outweighs the short-term deduction during healthy working years:
CRNA Insurance Example: When Disability Benefits Are Taxed
Consider a Certified Registered Nurse Anesthetist who purchases a CRNA insurance policy and pays $3,000 per year in premiums. If those premiums are deducted as a business expense, the monthly benefit received during a claim, let’s say $8,000/month, becomes fully taxable.
At a federal tax rate of 24%, the CRNA would lose $1,920/month to taxes, receiving just $6,080/month in net income.
Now imagine the same CRNA chooses not to deduct the premium. That same $8,000 monthly benefit would be received tax-free, providing the full value as originally intended by the policy.
This illustrates why it may be more advantageous to pay CRNA insurance premiums with after-tax dollars, even if CRNA insurance rates are slightly higher than group coverage. The long-term gain is in the tax-free protection the policy provides.
The same principle applies to other types of coverage, including certified registered nurse anesthetist insurance, physician disability insurance, and residency disability insurance options, where the goal is to maintain full, usable income in the event of a career-disrupting event.
IRS Rule of Thumb for Disability Insurance Deductibility
Here’s how the IRS generally treats premiums and benefits:
- If a business or self-employed person deducts the premium → benefits are taxable
- If the individual pays the premiums personally (with after-tax dollars) → benefits are tax-free
If an employer pays for a group long-term disability policy and excludes the value from the employee’s income, any benefits received under a claim are also taxable.
What About Deducting Part of the Premium?
Some business owners wonder if they can split the premium—deduct part and keep part tax-free. Unfortunately, the IRS does not allow this. According to IRS Publication 525, if any portion of the premium is paid pre-tax, then the entire benefit becomes taxable.
Bottom Line: Focus on Tax-Free Benefits When Disabled
At Set for Life Insurance, we usually advise self-employed professionals, particularly those considering own-occupation, specialty-specific disability insurance for doctors, CRNA insurance policies, or residency disability insurance coverage, to pay their premiums with after-tax dollars to ensure the full benefit is received tax-free when and if it’s needed.
Disability insurance is designed to provide stability when work is not an option. The value of the benefit is maximized when it arrives untaxed, predictable, and ready to support your financial needs—whether that’s maintaining a lifestyle, paying down loans, or covering medical expenses.
Always consult your tax advisor for guidance on what’s best for your particular situation.
When does it make sense to deduct disability insurance premiums?
If you have a business overhead policy to cover your business expenses, it may make sense to deduct your premiums. Even though your benefits will be taxable at the time of claim, the benefits will be used to pay deductible expenses.
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