The tax implications of life insurance if you’re an individual, self-employed, own an LLC and more.
Life insurance is a long-term commitment that requires monthly contributions to a policy that could accumulate in value. Like retirement plans, life insurance policies can help you and your family transition to a new lifestyle without your income. Whether the benefit is used to support your family or to fund the costs of long-term care and retirement, using your life insurance as an investment is not unheard of.
Most retirement savings accounts are tax-deductible, and considering the similarities, you might think that life insurance policies are, too. Unfortunately, it’s not that simple. There are a handful of circumstances that determine whether or not life insurance is tax-deductible, but the short answer is: Probably not. With that being said, the question merits more than a simple yes or no. While you should always consult a licensed accountant for any tax questions, here are a few things you should know about the tax implications of life insurance.
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Unfortunately, life insurance premiums paid by individuals are not tax-deductible. Unlike an IRA or similar retirement savings account, life insurance policies are considered personal expenses, and not eligible for tax deductions.
For the self-employed…
Some people believe that life insurance can be written off as a business expense, but unfortunately this isn’t true. The IRS doesn’t consider life insurance to be a cost of doing business, so you won’t be able to write off any premiums you paid. With that being said, your premiums may be tax-deductible if you’re using life insurance as a way of protecting your business assets.
While the IRS allows LLCs to deduct most of the insurance premiums associated with business expenses, life insurance premiums are not eligible. However, if you’re the owner of an LLC and are paying life insurance premiums for employees, these premiums may be deductible. Keep in mind that this doesn’t apply if the business owner or LLC itself stands to benefit in any way from the coverage. For example, if your husband works for your business and you’re listed as his beneficiary on his employee life insurance policy, those premiums are not tax-deductible.
For S corporations…
Life insurance premiums are only deductible if the corporation is providing life insurance as an employee benefit. The employee will not be taxed on these premiums, as they should be excluded from the wages section on the employee’s W-2. However, there are a couple exceptions:
- For premiums to be excluded from wages, the S corporation must provide group life insurance rather than insurance to just a few key employees. If the policy favors key employees, the premiums must be listed as wages.
- If the corporation provides more than $50,000 worth of coverage for a single employee, the business has to report amounts paid over $50,000 as wages on the employee’s W-2.
If the corporation is a beneficiary or receives compensation when the employee dies, the premiums are not deductible. This includes corporate-owned life insurance policies taken out on behalf of employees. Though this type of insurance can provide protection against the loss of a key employee, monthly premiums are not tax-deductible.
For sole proprietors…
Unlike health insurance premiums, life insurance premiums are generally not tax-deductible for sole proprietors. Sole proprietors are treated just like S corporations in that premiums are only deductible if the corporation and owner aren’t beneficiaries under the contract.
Is life insurance tax-deductible? That depends on a lot of factors and how your business is structured. For the most part, life insurance premiums are not tax-deductible, but there are certain situations where they can be. Whether you’re an individual or a business owner, it’s essential that you consult a licensed accountant for any tax-related questions, as they can offer the most accurate advice based on your situation.