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Are life insurance premiums tax-deductible?
You probably can't write off your premiums — unless you're a specific type of business owner.
This article was reviewed by Andrew Flueckiger, a member of the Finder Editorial Review Board and certified insurance counselor and licensed insurance agent in five states.
Life insurance premiums and taxes
Unfortunately, life insurance premiums paid by individuals are not 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 husband works for your business and you’re listed as a beneficiary on his employee life insurance policy, those premiums are not 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.
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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.
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