Are insurance payouts taxable? Life, disability and long-term-care benefits in retirement
Runway's Other Income step lets you enter an Insurance payout, and it starts that line at 0% taxable. That default is right for some kinds of insurance money and wrong for others, and the difference is a matter of who paid the premiums and what the policy pays for. Here are the IRS rules for the three payouts retirees are most likely to meet, and what a mistake costs.
Is life-insurance money taxable?
Usually not. IRS Publication 525 says: "Life insurance proceeds paid to you because of the death of the insured person aren't included in your income." There are exceptions worth knowing. Interest that the insurer pays you on proceeds you leave with it is taxable. If you instead surrender a policy for its cash value, the amount you receive above the premiums you paid is taxable income. A one-time death benefit is also not a stream of income, so Runway has no place for it as such: when you receive one, the resulting money belongs in an account on the Accounts step.
Are disability benefits taxable?
It depends on who paid for the coverage. Publication 525: "if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy aren't taxable." The reverse follows: when your employer paid the premiums, the benefits are generally taxable income. That's the rule behind the Runway tooltip's wording that disability benefits are tax-free "only if you paid the premiums yourself." If you are drawing disability income when you retire, check who paid the premium during the years you were covered before you decide on a taxable percentage.
Are long-term-care insurance benefits taxable?
Benefits from a qualified long-term-care insurance contract, paid for services to a chronically ill person, can be excluded from income up to a daily limit. For 2026 that limit is $430 per day (Rev. Proc. 2025-32, section 3.62, which also applies to periodic payments from life-insurance contracts treated as paid because of a chronically ill person's condition). Over a year that is $156,950, which is above the roughly $130,000 median annual cost of a private nursing-home room in the latest industry survey (see the long-term-care post), so most benefits sit comfortably under it. Publication 525 explains how payments above the limit are handled, and whether a given policy is "qualified" is a question for the insurer.
The premiums have their own tax rule. Rev. Proc. 2025-32 (section 3.27) caps how much of a long-term-care premium counts as a medical expense in 2026, by your age:
| Age at the end of 2026 | Premium that counts as a medical expense |
|---|---|
| 40 or younger | $500 |
| 41 to 50 | $930 |
| 51 to 60 | $1,860 |
| 61 to 70 | $4,960 |
| Over 70 | $6,200 |
Those limits also apply when you pay the premium from a health savings account; see the HSA post. For what long-term care costs and how often it's needed, see the long-term-care post.
What does a wrong entry cost in a plan?
Take the sample couple Runway loads (Pat 65, Alex 64, $95,000 of spending) and give Pat a long-term-care policy that pays $60,000 a year for three years starting at 88. If the benefit is tax-free, it is spendable cash and changes nothing about tax. If it were taxable and you entered it at 100%, the engine adds it to ordinary income each year:
| Pat's age | Federal tax if entered as 0% taxable | Federal tax if entered as 100% taxable |
|---|---|---|
| 87 (before the benefit) | $15,087 | $15,087 |
| 88 | $15,948 | $29,148 |
| 89 | $16,870 | $30,070 |
| 90 | $17,742 | $30,942 |
| 91 (after) | $18,534 | $18,534 |
Over the plan, that is $39,600 of extra federal tax, or $13,200 a year, which is 22% of the benefit: the couple's marginal bracket in those years. That is an easy mistake to make, because this line sits right next to pensions, which really are taxable. The type you pick on the Other Income step sets the starting percentage, and the Taxable portion field is how you override it.
What should I enter in Runway?
- Pick Insurance for long-term-care or disability payouts that arrive as a stream. The Taxable portion starts at 0%.
- Set it to 100% for disability benefits your employer paid for, and to something in between only if you've worked out a split with a tax professional.
- Put the full payout in Annual amount, set Starts at and Ends at ages for the period you expect to receive it.
Add an insurance payout to your plan. See how much of it is spendable and how much is taxed, year by year.
Try the plannerWhat does this leave out?
- Whether your particular policy is "qualified," and how payments above the per diem limit are treated. Those are policy-specific.
- Reimbursement policies versus per diem policies. Runway takes whatever annual amount you enter; it doesn't check it against your costs.
- Premium deductions. The age-based limits above affect your itemized medical deduction, which the engine doesn't model (it uses the standard deduction).
- State tax on these payouts, unless you've set a state in Runway's Pro settings.
How were these numbers computed?
The $430 per day limit and the premium table come from IRS Rev. Proc. 2025-32 (2026 inflation adjustments). The tax figures come from Runway's engine on the sample household, married filing jointly, 2026 federal brackets, plan through age 95, with Runway's own long-term-care cost left out so the effect of the insurance payout is isolated. The benefit is $60,000 a year for three years starting at Pat's age 88; "lifetime tax" is the sum of the projected federal tax over every year of the plan, in today's dollars.