Disability Insurance Lump Sum Settlement - Taxable or Not?

Many claimants are presented with offers to resolve pending disability insurance claims in exchange for a lump sum settlement with their disability insurance company. An important question in determining whether a claimant can even consider pursuing this option, which is a very personal choice for each claimant, and largely based upon numerous factors, is whether the benefit payment to be paid as a lump sum will be taxable or whether it will be a tax free payment.

While we do not provide tax advice - as we are attorneys who focus our practice on disability insurance claims, and not tax law, a recent decision from the United States Tax Court offers some useful guidance. A claimant had received a lump sum payment to resolve a litigation with his insurance company. While the company provided the claimant with tax documentation, the claimant took the position that the payment was not taxable as it was for his injury. The taxing authorities took the position that it was payment for loss of earnings, and thus taxable. The Tax Court agreed that the payment would be taxable, as it was for the loss of earnings.

However, not every loss of earnings benefit payment is going to be taxable. Where a claimant pays for his or her disability coverage out of post-tax dollars, the benefits are ordinarily tax free.

If you have a disability claim that is being paid, and wish to consider a lump sum settlement, or if your disability insurance company has offered a lump sum settlement, contact us to discuss how to proceed.