Are Life Insurance Premiums Tax Deductible?

Contrary to popular belief there are very few situations where life insurance premiums are tax-deductible.
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Author: Brian Greenberg CEO of True Blue Life Insurance
Last updated: June 21, 2021

While premiums on long-term investment vehicles like an HSA or IRA  are deductible, life insurance is a different story.

It pays off, in the long run, to understand whether you qualify for these few situations. This can keep you out of hot water and give you peace of mind for tax season.

Why aren’t life insurance premiums deductible?

Essentially, if you deduct your premiums, it makes all of your death benefits taxable.

If you still wind up deducting those premiums, then you can land yourself in a sticky situation that will cost you more money in the long run. Consider a person who has a million-dollar policy. If they deduct their premiums from their income tax returns, then death benefits become taxable. This means their beneficiaries will have to pay roughly 30% in taxes, totaling around $300,000. In the end, this is $300,000 that they wouldn’t have to pay otherwise.

Deduct Premiums
Your beneficiaries will pay roughly 30% in taxes.
Don’t Deduct Premiums
Your beneficiaries will receive the death benefit in full.

Considerations like this drive home the importance of understanding your options, so you don’t leave costly mistakes for your family. In essence, not deducting the premium helps keep the benefits tax free.

What are the exceptions for individuals?

For individuals, the bad news is that their life insurance premiums, for the most part, aren’t tax-deductible. Here are the two primary exceptions to that rule:

  • Alimony:

    Spouses paying court-ordered alimony can purchase a life insurance policy to cover payments in the event of their death. The premiums for this type of policy are tax-deductible.

  • Charity Owned Life Insurance:

    The same is true of a life insurance policy owned by a charity. The insured makes donations to the charity equal to their premiums and then deduct the premiums.

These are the only two primary situations for individuals who can deduct life insurance premiums. Otherwise, the premiums are not deductible.

Are life insurance premiums deductible as a business expense?

Often, people think that running a business entitles them to premiums that are deductible as a business expense, but that isn’t actually the case. See if your business qualifies to deduct life insurance premiums as a business expense.

Are life insurance benefits taxable?

No. Life insurance benefits are not taxable in most situations. But, the benefits become taxable if you deduct your premiums.

Conclusions:

While deducting life insurance premiums may seem like it should be straightforward, it really isn’t. Tax codes make it difficult to know what deductions are and aren’t eligible, so it pays to do your research. If you still have questions about your eligibility for deductions, finding professional help is much cheaper than making expensive assumptions.
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About the author
Brian Greenberg author
Brian Greenberg
Founder and CEO
Brian is licensed to sell life, health, annuities, and property and casualty insurance in all 50 U.S. states. He is the author of The Salesman Who Doesn't Sell and is a member of the Million Dollar Round Table, an organization that consists of the top 1% of financial advisors worldwide.