Is Life Insurance Tax Deductible?

December, 02 2024 by Glynis Miller, CPA, MST

Discussing the subject of life insurance is not always popular because it makes us confront the purpose for which it was purchased. Many families depend on the proceeds from a life insurance policy to first take care of the immediate needs for burial costs. Additionally, they are used as a replacement for the income of the insured party to cover bills and everyday living costs so those who are left behind after they are gone do not also suffer a financial loss.

There are many types of life insurance, and this article will not discuss them all or try to identify the best type of policy one should obtain. However, it will discuss some key issues related to whether it is tax deductible and a few potential tax benefits.
 

Are Life Insurance Premiums Tax Deductible?

So, the first question tackled is: Is life insurance tax deductible? When this question is asked, people are generally asking about the premiums paid for life insurance and not the actual payout from the policy. The short answer is generally no; the premiums are not a deduction on your tax return. Why? Well, most premiums are paid as a personal expense, and most personal expenses are just not deductible.
 

Can you Deduct the Life Insurance Premiums as a Business Expense?

The short answer is that it depends. Generally, there is an exception for business owners who pay the life insurance premiums for their employees. In that case, as part of normal business expenses, the business owner could deduct the premiums as a qualified business expense.

A warning should be noted here for businesses paying life insurance premiums for a key employee life insurance policy or a business partner’s life insurance policy; the tax treatment may be different than when paying the premiums for general employees. For this type of insurance, the business is often the beneficiary of the policy. Thus, when the policy is paid out, the business receives the life insurance proceeds to use as it sees fit related to the business. Generally, this type of insurance is seen in small businesses or firms where the business relies heavily on one or two key employees, or one of the partners may be the primary person behind the business operations. Under these circumstances, where the business is the beneficiary, the premiums would not generally be a qualified deductible business expense.
 

Is Group-Term Life Insurance Tax Deductible?

Generally, group-term life insurance is paid by an employer for their employees and allowed as a business deduction. Employees are taxed as if they received income for any premiums paid for the life insurance policy in excess of $50,000. As an individual employee, you cannot take a tax deduction for the value of the premiums included in your taxable income.
 

Does Term Life Insurance have Tax Benefits?

When a term life insurance policy is paid out to a beneficiary, the death benefits (proceeds) are generally not included in taxable income on a federal income tax return. Although the intent behind having life insurance is to help take care of the family, the tax code does not retreat the proceeds as reimbursement for any loss, making it non-taxable income.
 

Does Whole Life Insurance have Tax Benefits?

When a whole life insurance policy is purchased, there is a portion of the policy known as the cash value. A whole life insurance policy can grow the cash value portion as premiums are paid, and there are no immediate income tax consequences for the interest paid on that cash value. This tax benefit is considered a tax-deferred benefit of having a whole life insurance policy. However, this tax-deferred treatment is only good if the funds remain in the policy.

Many people will get a whole life insurance policy for the non-tax benefits related to the accumulation of the cash value and the benefit of being able to take a loan against the cash value, draw it out, or surrender the policy for its cash value. Generally, if a loan is taken against the cash value, no taxable event occurs because the loan will be repaid. However, tax consequences can occur if any cash is withdrawn as a distribution that exceeds the cost of the policy or the policy is surrendered for its cash value; these actions generally result in taxable income. Because of the complexity related to this type of transaction, individuals should seek a tax professional who can review all the terms of the Whole Life Policy to calculate the proper taxable income, if any. For the policy beneficiary, the payout of death benefits generally does not result in taxable income.
 

In Summary

The life insurance premiums paid as an individual or a business owner, if you are the beneficiary of the policy, are not deductible on your tax return. This is primarily because the IRS views these expenses as personal or non-deductible expenses. However, if life insurance premiums were paid by a business owner solely for its employee's benefit, the premiums could be deductible as a qualified business expense related to that business tax return if certain other conditions are met. A life insurance beneficiary is the individual or entity who receives the death benefits that are paid out in the event of death. As noted, the positive note is that generally, the death benefit money a beneficiary receives due to the death of an insured individual is tax-free.