That depends on how the policy premiums were paid. If you bought a private policy and paid the premiums after-tax, then the benefit is not taxable. If the policy was furnished by her employer, and either the employer paid the premiums as a tax-free benefit, or she paid the premiums as a pre-tax deduction (or a combination of both) then the benefit is taxable income, and should be reported on a W-2, either from the employer or from the LTD company. (They might or might not withhold income taxes, but the income is taxable if it is on a W-2. If no income taxes were withheld, you might be underpaid and owe a big bill and penalty.)
