How Business Owners and Executives Can Make Disability Insurance Benefits Tax-Free

ARTICLE | September 15, 2026

If your company pays for your long-term disability insurance, that benefit may come with a costly hidden catch. Most disability policies cap payouts at just 60 to 70 percent of your pre-tax salary, and if your benefits are taxable, a 30 to 40 percent tax bill can leave you with far less income than you need in the event you are unable to work. The good news is there is a straightforward strategy that business owners and executives can use to convert those taxable disability benefits into tax-free income, without giving up employer-paid coverage. With proper planning and the right structure in place, you can protect your financial security before an unexpected illness or injury forces the issue.

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