The general rule
If you pay all the premiums on disability coverage yourself, the benefit is generally received tax-free. If the employer pays them, wholly or partly, the benefit is generally taxable.
The effect on the amount to insure
A smaller tax-free benefit can deliver the same net income as a larger taxable one. That is why you never insure one hundred percent of gross income: insurers cap the amount for the same reason.
Why the insurer caps it
Contracts limit the benefit to a fraction of income precisely so that returning to work stays better than staying on claim. The cap is not stinginess: it is what keeps the product insurable.
Critical illness and life insurance
A critical illness benefit and a life insurance death benefit are generally received tax-free. The logic differs from disability; do not transpose the rule.
Confirm before deciding
Tax treatment depends on the plan’s exact structure, the arrangement with the employer, and your situation. Have the applicable treatment confirmed by a tax specialist or your registered advisor before fixing an amount.
No rate, price, or recommendation on this page. Amounts and limits change: verify them with official sources before deciding.