Are Life Insurance Premiums Tax Deductible?
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Ty Stewart
Licensed Life Insurance Agent
Ty Stewart is the founder and CEO of SimpleLifeInsure.com. He started researching and studying about life insurance when he got his first policy for his own family. He has been featured as a life insurance expert speaker at agent conventions and in top publications. As an independent licensed life insurance agent, he has helped clients nationwide to secure affordable coverage while making the...
Licensed Life Insurance Agent
UPDATED: May 9, 2023
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UPDATED: May 9, 2023
It’s all about you. We want to help you make the right coverage choices.
Advertiser Disclosure: We strive to help you make confident insurance decisions. Comparison shopping should be easy. We are not affiliated with any one insurance provider and cannot guarantee quotes from any single provider.
Our insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different insurance companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.
On This Page
- The IRS considers life insurance premiums as a personal expense
- Your beneficiary will receive a death benefit or payout of your life insurance policy typically in a lump sum
- Businesses that offer their employees a life insurance policy can deduct the insurance premium as a business expense
Life insurance offers peace of mind, but paying those annual premiums can still be a headache. Plus, as time goes on, each premium payment can add up and leave your wallet feeling a little thin. But, if they were tax-deductible, you would be able to save a little money here and there.
So, at some point, you may have asked yourself: are life insurance premiums tax-deductible?
In most cases, the IRS considers life insurance premiums as a personal expense. That means — unfortunately — they aren’t considered tax-deductible except in a few specific cases.
It pays to know if you’re eligible for any tax-related benefits. Curious to see if you qualify? Keep reading this guide to learn more and to find out how to compare and buy life insurance coverage online.
Understanding Life Insurance
Life insurance is set up to ensure your family will be financially stable even when you’re gone. Your beneficiary will receive a death benefit, or payout of your life insurance policy typically in a lump sum. Because life insurance isn’t tax-deductible, death benefits are considered tax-free.
But wait — who can be a beneficiary? A beneficiary can be anyone or any entity that you want such as:
- Your spouse
- Children
- Relatives
- Parents
- A business or trust
- A charity
Death benefits and life insurance are generally in place to support a family or household after the sudden loss of income. It can also work the same for businesses who may use it when a key employee passes away. The life insurance policy helps to transition power smoothly to someone else. It’s also possible for them to get a tax deduction.
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Filing Life Insurance as a Business Expense
Businesses that offer their employees a life insurance policy can deduct the insurance premium as a business expense. They can also do this with business partners or key members of the company whose absence would have a significant impact. But, this does come with its own rules and stipulations.
There are two major IRS rules to know if you’re considering this option:
- Your business cannot benefit from this insurance coverage. Translation? Anyone with a financial interest in the business cannot be included.
- Life insurance for your employees can be considered a business expense. But “if the insurance coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer”, the employees’ death benefits will be considered taxable.
Since death benefits are considered tax-free under normal circumstances, if your business deducts the insurance premium, you may run the risk of their beneficiaries having to pay extra taxes.
Life Insurance Premiums as Charitable Contribution
On the list of possible beneficiaries, you can choose a charity organization to receive your death benefits. This may even be a potential opportunity to receive a tax break.
Naming a charity as your beneficiary comes with a variety of advantages. For one, after you pass, the charity will receive the full amount of your death benefits without having to pay taxes for it. Since there is no limit to the amount they can accept, no one’s policy donation can be too large or too small.
The biggest benefit for the insured is the feeling of having made a positive impact on the world. Another benefit is that for some people, they can also use it to greatly reduce their estate tax, but this tax benefit is mostly for those in the upper-income individuals.
The Exceptions to the Rule
The general rule is that your death benefits are tax-free. This allows for your beneficiary to receive the maximum amount of financial security. But, there are a few exceptions to that rule.
- Paid installments – If your beneficiaries were to receive the death benefit in annual installments, insurance companies could potentially tax them for it. When the payments could earn interest as in between installments, that could make them taxable.
- Withdrawing funds – When you take out money from the insurance policy’s cash value account, it can be a taxable interest if the amount is greater than the basis.
- Surrendering – If you decided to cash out your whole life insurance policy, it would be considered “surrendering” and can cause a tax liability. If you cash out more money than you put in, you’ll have to pay income tax for it.
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Your Trusted Source for Life Insurance Quotes
When it comes to taxation on life insurance policies, it can get complicated quickly. To avoid tax liability, you’ll need trusted opinions and resources to help you navigate various life insurance legalities.
Unsure of where to start? We can help. Our website has tons of resources devoted to helping you learn and stay informed on different life insurance policies and insurance companies. You can find the answer to any insurance-related question you have and conveniently compare insurance companies using our comparison tool.
When you’re ready to get started, check out our website and enter your zip code for free insurance quotes.
Frequently Asked Questions
Can I deduct the premiums paid for a life insurance policy owned by my business?
It depends on the type of business entity and the reason for purchasing the policy. In some cases, premiums paid for a life insurance policy owned by a business may be tax-deductible.
What is considered a “chronically ill individual”?
A chronically ill individual is someone who is unable to perform at least two activities of daily living (ADLs) or who requires substantial supervision due to a cognitive impairment.
What are the requirements for a long-term care insurance policy to be considered “qualified”?
The policy must be intended to provide coverage for necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, as well as maintenance or personal care services, which are required by a chronically ill individual.
What is a qualified long-term care insurance policy?
A qualified long-term care insurance policy is one that meets certain requirements set forth by the IRS.
Are there any exceptions to this rule?
Yes, in some cases, premiums paid for a qualified long-term care insurance policy may be tax-deductible.
Can I deduct premiums paid for a life insurance policy that is part of an employee benefit plan?
Yes, in some cases, premiums paid for a group life insurance policy that is part of an employee benefit plan may be tax-deductible.
Are you looking for free insurance quotes?
Your one-stop online insurance guide. Get free quotes now!
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Ty Stewart
Licensed Life Insurance Agent
Ty Stewart is the founder and CEO of SimpleLifeInsure.com. He started researching and studying about life insurance when he got his first policy for his own family. He has been featured as a life insurance expert speaker at agent conventions and in top publications. As an independent licensed life insurance agent, he has helped clients nationwide to secure affordable coverage while making the...
Licensed Life Insurance Agent
Editorial Guidelines: We are a free online resource for anyone interested in learning more about insurance. Our goal is to be an objective, third-party resource for everything insurance related. We update our site regularly, and all content is reviewed by insurance experts.