Arkansas Life and Health Insurance Practice Exam 2026 - Free Life and Health Insurance Practice Questions and Study Guide

In the context of disability insurance benefits, the taxability of those benefits can depend largely on who funded the premiums for the policy. Since Jay's employer contributed 75% of the premium for his disability policy, this portion would typically be considered taxable income to him when benefits are received.

In this scenario, Jay receives an annual benefit of $10,000. To determine how much of that benefit is subject to income tax, we first calculate the portion of the premium that was paid by Jay versus what was covered by his employer. Since the employer paid 75%, Jay contributed the remaining 25%.

Thus, if we break down the $10,000 benefit:

- 75% of the benefits would be taxable because that portion corresponds to the employer's contribution.

- This amounts to $7,500 being taxable.

Conversely, the portion of the benefit corresponding to Jay's own contribution would not be taxable. Jay contributed 25%, which equates to $2,500 of the total benefit that he personally funded and is therefore tax-free.

This breakdown brings us back to understanding that since the taxable portion is determined by the employer's contribution, the benefit amount that Jay is required to recognize as taxable income is indeed $