Are life insurance premiums tax-deductible?

Life insurance is a valuable investment for anyone with dependents relying on them financially. Whether you buy a temporary life insurance policy or a long-term permanent life insurance plan, life insurance offers a way for you to protect your loved ones after you’ve passed.

Since most life insurance policies are a lengthy investment, understanding the ins and outs of your plan is essential. One important aspect is how your taxes are affected by your life insurance. Most life insurance policy payments are not deductible, but there are exceptions to that rule.

Read on to learn how your life insurance payments affect your taxes and whether you can get tax-deductible life insurance premiums. Then, compare rates with as many life insurance companies as possible to find the most affordable prices.

Is life insurance tax deductible?

According to the IRS, life insurance payments are personal expenses that are not tax deductible. The exception to this rule is when an employer buys life insurance on behalf of their employees. In this case, payments made might be tax deductible.

Other common exceptions where you can take a tax deduction for life insurance payments include

• Group life insurance. Small business owners can take an exclusion for the first $50,000 for group life insurance. The total benefit can’t exceed $50,000, or it will be included in your income taxes.
• Charitable donation. You can earn a tax benefit by transferring ownership of your policy to a charitable organization, including on payments you’ve already made.
• 162 Executive Bonus Plans. As long as the executive reports it as taxable income, business owners can deduct payments on plans that cover key employees in their organizations.
• Alimony agreements. People required to buy life insurance as a part of an alimony agreement may qualify for a tax deduction. However, this only applies to agreements made before 2019.

Read more: Life Insurance for Business Owners

Aside from these situations, life insurance payments are rarely tax deductible. If you have questions about the tax-deductible status of your life insurance, a financial advisor will be able to help.

What is a tax deduction?

Tax deductibles are items on your return that lower the amount of your taxable income. Tax deductibles lower the amount you need to pay during the year. For most people, that means paying less during the year or receiving a larger refund.

Some of the most common tax deductions include

• Student loan interest
• Contributions to a health savings account
• Mortgage interest
• Contributions to an IRA, 401K, or other retirement plans
• Self-employment costs
• Gambling losses
• State taxes

Tax deductions can be confusing, so getting help is essential when you’re filing your taxes. A tax professional can sort through everything in your financial profile to ensure you get as many deductions as possible.

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Why isn’t life insurance tax deductible?

Life insurance isn’t a tax deduction because the IRS considers it a personal expense. You choose to buy life insurance the same way you purchase clothing, video games, and other products. Life insurance is never required by state or federal law, so payments are not tax deductible.

Additionally, the death benefit of your life insurance isn’t taxed. The money your beneficiary receives from your policy after your death is typically tax-free as long as it’s paid in a lump sum.

Can you write off life insurance payments as a business expense?

One of the only ways to get a tax deduction for life insurance premiums is when you buy it as a business expense. Common ways for a business to get a tax deduction on life insurance expenses include

• Business partners decide to purchase a life insurance policy in case one partner dies, and the other will use the plan to purchase the shares.
• Small businesses that offer a group life insurance plan or employer-provided life insurance with a total benefit under $50,000.

It’s important to know that you can’t claim a life insurance tax deductible if you directly or indirectly benefit from the policy.

No matter your business life insurance situation, you should speak with an accountant before you file your taxes. The IRS has complicated rules when it comes to deducting life insurance payments on your taxes, and you don’t want the headache of messing up.

How do you write off life insurance as a charitable donation?

While most people buy life insurance to provide a large payment for a close relative or friend, you can also buy a policy to donate it.

If you make a charitable organization your beneficiary, you can claim the payments you make as tax deductible.

While not a charitable donation, life insurance is required in some states as security for child or spousal support. If you’re required to buy life insurance, your payments will likely be tax deductible. However, you should discuss your options with your divorce lawyer or an estate planning attorney.

Is there a life insurance tax for beneficiaries?

While life insurance payments are usually not tax deductible, life insurance is not taxable to the beneficiary either. Beneficiaries typically don’t pay taxes when they receive a payment. However, there are a few times when you might need to pay taxes on a death benefit. The most common reason is when you receive a payout of a permanent policy’s cash value.

Permanent life insurance policies include cash value accumulation, which policyholders can use as collateral for loans, emergency funds, or anything else. The money accumulated in a permanent life insurance plan grows on a tax-deferred basis. Since the cash value is tax-deferred, you’ll have to pay taxes if the policy is surrendered or turned over to a beneficiary.

No matter your situation, an accountant, financial advisor, or insurance representative can help you maximize your tax benefits.

Case Studies: Tax-Deductible Life Insurance Premiums

Case Study 1: John’s Charitable Donation

John, a successful business owner, wanted to support a charitable organization through his life insurance policy. He named the charity as the beneficiary and made regular premium payments. As a result, John was able to claim the payments he made as a tax deduction, reducing his taxable income and supporting a cause close to his heart.

Case Study 2: Sarah’s Business Expenses

Sarah, a self-employed consultant, recognized the importance of life insurance for her business. She purchased a life insurance policy as a business expense to protect her company’s financial stability. By treating the premiums as a deductible business expense, Sarah reduced her taxable income and ensured her business’s continuity.

Case Study 3: Mark’s Alimony Agreement

Mark, who divorced prior to 2019, had an alimony agreement that required him to maintain a life insurance policy. The premiums he paid as part of the agreement were considered tax-deductible expenses. Mark sought advice from his divorce lawyer and maximized the tax benefits associated with his life insurance payments.

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The Bottom Line on Tax Deductible Life Insurance

While life insurance is a valuable investment, payments are usually not tax deductible. While you can’t deduct life insurance payments, the financial protection it offers your beneficiaries is worth it.

Now that you know that life insurance payments aren’t usually tax deductible, your next step should be comparing quotes with as many companies as possible. Life insurance is a long-term commitment, so finding an affordable policy is crucial.

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