My Cancer Insurance carrier, American Fidelity, told me it made no difference as to whether or not the premiums were paid pre-tax or after. For instance, up to the point of my diagnosis my premiums were taken out of my paycheck and sent to American Fidelity by our Payroll Department pre-tax. After I was diagnosed I was dropped from the policy, but kept it for my husband and children. I asked the American Fidelity rep today if my husband were now diagnosed would the benefit be reported as misc income on a 1099 and she said yes because they treat these insurance policies as 125 plans. So, regardless of whether the premiums came out of my pay before tax, or now after tax, they would report the monies exactly the same on a 1099. This really doesn't seem fair at all. IRS Publication 525 says that if I pay the premium (no mention of whether it is with before or after taxes), the benefit is not taxable!
