Are life insurance premiums tax-deductible?
You probably can't write off your premiums — unless you're a specific type of business owner.
In most cases, life insurance premiums aren’t tax-deductible — even for individuals or businesses who can deduct other kinds of insurance. But you might be able to write your premiums off as a business expense if the coverage is an employee benefit.
Life insurance premiums and taxes
Unfortunately, life insurance premiums paid by individuals aren’t tax-deductible. Unlike IRAs and similar retirement savings accounts, life insurance policies are considered personal expenses — so they’re not eligible for tax deductions.
For the self-employed
Many people believe life insurance can be written off as a business expense, but that’s not the case. The Internal Revenue Service (IRS) doesn’t view life insurance as a necessary business cost, so you won’t be able to deduct any premiums you paid for coverage. That being said, your premiums may be tax-deductible if you’re using life insurance as a way to protect your business assets, like an office space or other capital.
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 your 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 life partner works for your business and you’re listed as a beneficiary on their employee life insurance policy, those premiums aren’t tax-deductible.
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 two exceptions:
- For premiums to be excluded from wages, the S corporation must offer 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-corps in that premiums are only deductible if the corporation and owner aren’t beneficiaries under the contract.
How to deduct disability insurance premiums
You can’t deduct disability insurance premiums from your personal taxes.
But if you’re a business owner, there are some instances where you deduct disability insurance from your taxes. It will depend on the type of business entity you own, who’s paying the premiums, and whether they’re using pre-tax or after-tax money.
Sole proprietors can’t deduct disability insurance premiums from their business taxes — just like an individual can’t deduct disability premiums from their personal taxes.
The business in a sole proprietorship is legally the same as the individual who owns it, it’s not treated as a separate legal entity. This means that all business income is taxed to the individual.
Disability insurance premiums may be deducted by an S-corporation on shareholders or employees who own at least 2% of the business.
If an S-corp is paying the premiums for a disability policy for one of its employees, they can deduct that premium from their taxes. The employee can’t deduct the premiums on their own taxes, but they will receive the benefit tax-free if they collect on the policy.
C-corporations may deduct disability premiums from their taxes if it pays for premiums on behalf of the employee. Shareholders who are not employees do not qualify for the premium to be deducted.
However, if the C-corp excludes the premiums from the employee’s income, then the benefit will be taxable if the employee collects.
LLCs operate the same way as C-corporations and can deduct disability premiums from the LLC’s taxes. However, the benefits might be taxable to the employee or shareholder. If the employee or shareholder pays their own premiums, then the benefit will be tax-free.
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What tax benefits does life insurance offer?
While you may not be able to write off your life insurance premiums, you’ll still score several tax benefits:
- Tax-free death benefit. Your beneficiaries aren’t required to pay taxes on the death benefit payout. However, if your death benefit is paid out over time, instead of a lump-sum, any interest added will be taxable.
- Tax-deferred cash value. With permanent life insurance, the cash value part of your policy grows without being taxed. Since the interest you make on your cash value is applied to a higher amount, this means your cash value grows faster.
- Tax-free policy loans. If you have permanent life insurance, any loans you take out from your policy aren’t considered taxable income as long as it doesn’t exceed the amount of premiums you’ve paid into your policy.
For the most part, life insurance premiums are not tax-deductible, but there are a few exemptions. If you’re an individual or a business owner, it’s worth consulting a licensed accountant for any tax-related questions, as they can offer the most accurate advice based on your situation.
When you’re ready to purchase a policy, compare life insurance providers to get the best possible deal.
Frequently asked questions
- How will I be taxed on the cash value accumulation of a permanent life insurance policy?
Permanent life insurance policies have two components: the death benefit and the cash value. The cash value portion is placed in a separate account and accumulates interest over time. Like any other interest-based income, it’s subject to taxes. However, the earned interest is tax-deferred, so you won’t pay taxes on it until you cash out.
- What is group life insurance? Are premiums tax-deductible?
Group life insurance is employer-subsidized life insurance. It’s typically offered as an employee benefit.
The employer is listed as co-owner or at least a partial beneficiary of the policy. Since the employer stands to gain from this contract and it’s not an essential operating expense, premiums are not tax-deductible.
- What is a key man life insurance policy?
A company takes out a key man life insurance policy to protect losses from the death of a valuable partner, manager or owner whose skills are vital to the success of the company. The individual doesn’t hold the policy — the company is both the owner and the beneficiary. The premiums are usually not tax-deductible, unless the company charges them to the insured individual as taxable income.
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