Is Life Insurance Tax Deductible?

May 4, 2022

The IRS allows many deductions or write-offs to help lower your tax liability. Many people wonder if life insurance premiums are one of those luxurious write-offs. Unfortunately, the short answer is that they aren’t tax deductible. But, there is an exception that may help you.

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Why Life Insurance Premiums Aren’t Tax Deductible

First, let’s look at why you can’t deduct your life insurance premiums. The IRS has a few reasons:

  • Life insurance is a voluntary expense. The state or federal law doesn’t require you to carry life insurance. You choose to purchase it and pay the premiums. Unlike car or health insurance, you can go without life insurance (it may not be smart) but the law doesn’t state that you need it.
  • Life insurance is a personal expense. If you look at the other allowable tax deductions, none of them are for personal expenses. The IRS considers life insurance to be in the same category – it’s a personal expense. You can’t write off your car payments or your credit card interest, and the same goes for your life insurance premiums.

Do you Own a Business?

Here’s the exception. Like many other insurance premiums that you can’t deduct as a consumer, but you can as a business owner, life insurance premiums fall under the same category. If you pay life insurance premiums for your employees, you may be able to deduct it, but there are limits. You may only deduct the premiums on the first $50,000 in coverage per employee. You cannot take this deduction if you are the named beneficiary on any policy, though.

Do You Pay Alimony?

Alimony agreements sometimes require you to purchase a life insurance policy with your ex-spouse as the beneficiary. This helps ensure that the ex-spouse still receives payments upon your death. If it’s a court-ordered requirement, you may be able to deduct the premiums on your taxes.

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The Other Tax Rules

While it may seem unfair that you can’t write off the premiums you pay on life insurance for many years, life insurance does provide tax benefits after payout. Typically, beneficiaries receive the money from life insurance tax-free. The only exception to this rule is if your beneficiaries receive the payout over time. If the money accumulates interest during that time, the interest earned becomes taxable income, but the actual payout doesn’t.

If you receive any benefits from your life insurance while you are alive though, as is the case with permanent life insurance policies, you may be subject to tax. This is where it gets tricky.

If you have a whole-life policy that accumulates interest over the life of the policy, you may pay taxes on a certain portion. The interest accumulation that equals your premiums will remain tax-free. Any income you make beyond the total of the premiums paid, though, becomes taxable income.

The same is true for dividends paid out by life insurance policies. Any income you receive that is equal to or less than the premiums paid remains tax-free. Once you make more than the premiums you paid out, though, it becomes a part of your taxable income.

Life insurance helps protect your beneficiaries in the face of your untimely death. You have many options for different types of policies Talk with your insurance agent about the policies available to you and how they will affect everyone’s taxes, including your own should you receive benefits from a permanent policy while you are still alive.

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