Taxation on Disability Settlements

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Taxation on disability settlements typically works in a very particular way. Find out more about taxation on disability settlements with help from a top insurance attorney in this free video clip.

Part of the Video Series: Disability Insurance & More
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Video Transcript

I'm Frank Darras, America's Top Insurance Attorney. And today, we're going to talk about whether your disability settlement can be taxed. In my practice, I have the largest individual and long term disability practice in the country. Many disability insurance companies present an offer to our clients on settling their long term disability claim in a lump sum in exchange for a surrender of their policy. The question to ask is, "Will a lump sum be taxable or tax free?" In many cases, the lump sum is taxable, sometimes to as much as 45 percent of the settlement. Often, tax authorities will consider your settlement as payment for the loss of earnings not for injury and therefore, it becomes taxable. This can happen even if you work with the insurance company to provide settlement document language. It's best to consult a top disability attorney before accepting a lump sum that can result in a high tax bill. With very few exceptions, disability benefits from an employer paid long-term disability plan will generally be taxable in the year received. If the employer paid the premium, the benefits are going to be taxable just as if you were working. However, not every loss of earnings benefit payment is going to be taxable. If you paid the cost of the disability insurance or was individually purchased from an agent or broker, a private disability policy and you pay the premiums not your corporation, the benefits are generally not taxable. If disability benefits are taxable in the first place, the lump sum settlement of the disputed claim is also generally going to be taxable. The consequence of a lump sum settlement can be quite expensive, especially compared to receiving the benefits on a normal monthly payment schedule. One way to help relieve these costs are itemize deductions to your income. This can include the fees paid to a top disability attorney or their expert witnesses. These miscellaneous expenses are subject to the two percent adjusted gross income rule. Taxation on disability settlement gets really tricky and claimant should be really careful before accepting a lump sum settlement. If your face with this situation, consult an experienced and top disability lawyer to discuss your options. The carriers are going to give you the total present value of your settlement. In other words, what would you invest today that if you got all the benefits today, put it in a bank, put it away until the age 65 or age 67, it would add up to your monthly benefits over that time frame. That's called the present value. The carriers generally can offer between 50 and 65 percent of the present value to settle your long term or individual disability claim. They're also going to take into consideration mortality. What is your increased risk of death as a result of your sickness or injury that's disabling? As you can see, it's important to get top help when it comes to accepting or rejecting a long-term disability or individual disability lump sum settlement. I'm Frank Darras, Founding Partner of Darras Law, Ontario, California.

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