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New Member
posted May 31, 2019 5:05:43 PM

Is the lump sum payout from a cancer policy taxed?

My husband received a lump sum payout from a Critical Illness Insurance Policy (Cancer policy). The premiums for this policy are paid with pre-tax money. Is the lump sum payout reportable income? How is it taxed?

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6 Replies
New Member
May 31, 2019 5:05:45 PM

How the proceeds are handled are dependent on how it was paid through the employer. Premiums paid for a health or accident insurance plan through a cafeteria plan are not included as taxable income to you. The premiums are considered paid by your employer, and disability benefits are fully taxable. Please verify if the premiums were pretax and not payroll deductions after taxes. If the premiums were  paid as an after-tax payroll deduction, you would not be subject to double taxation. After verifying the method in which the premium was paid, we can better assist you.

New Member
May 31, 2019 5:05:46 PM

It says on my first Explanation of benefits from the lump sum on the critical illness insurance that "the premium for your cancer policy was paid before tax, under your Employer's section 125 plan" and that they will issue a 1099 reflecting this payment.

Alumni
May 31, 2019 5:05:47 PM

Because it's an employer provided fringe benefit, they are correct.  It is subject to tax.

Alumni
May 31, 2019 5:05:52 PM

Proceeds of an accident and health policy are not reportable as income so long as you did not deduct the premiums, and so long as this is not an employer provided fringe benefit. If both you and your employer have paid the premiums for the plan, only the amount you receive for your disability that is due to your employer’s payments is reported as income.


New Member
Apr 7, 2025 9:06:15 AM

Hello, 

my spouse and I are in the same financial situation as what you stated and received our payment recently. Do you happen to remember the percentage that was taken for taxes so we can better prepare by setting money aside? 

Expert Alumni
Apr 7, 2025 10:10:39 AM

20% is typically withheld when you take a taxable distribution from an insurance policy or pension/annuity plan.

 

@Ashleymac8920