Are Life Insurance Premiums Tax Deductible?

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D. Gilson is a writer and author of essays, poetry, and scholarship that explore the relationship between popular culture, literature, sexuality, and memoir. His latest book is Jesus Freak, with Will Stockton, part of Bloomsbury’s 33 1/3 Series. His other books include I Will Say This Exactly One Time and Crush. His first chapbook, Catch & Release, won the 2012 Robin Becker Prize from Seve...

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Written by D. Gilson, PhD
Professor & Published Author D. Gilson, PhD

Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insuranc...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years Leslie Kasperowicz

UPDATED: Dec 21, 2021

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The Highlights

  • 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:

  1. Your business cannot benefit from this insurance coverage. Translation? Anyone with a financial interest in the business cannot be included.

  2. 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.

Are you looking for free insurance quotes?

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