Is Life Insurance Tax Deductible?

Life insurance premiums are typically not tax deductible because the Internal Revenue Service (IRS) considers them an optional personal expense. However, there are specific scenarios where you might be able to claim a deduction.

The tax treatment of life insurance premiums paid by an employer may be different. If your employer pays your premiums, those amounts could be deductible for the employer. If you have spousal or child support agreements made before 2019 that include life insurance premiums, those may be deductible. Additionally, if the beneficiary of your policy is a charitable organization, the premiums could qualify for a charitable deduction. These scenarios reflect the broader tax benefits of a life insurance policy.

• Why Life Insurance Premiums Usually Are Not Tax Deductible
• When Life Insurance Is Tax Deductible
• When You Have to Pay Taxes for Life Insurance
• Other Potential Tax Implications and Benefits of Life Insurance
• Other Insurance-Based Tax Deductions
• FAQ

Life insurance premiums are generally not eligible for tax deductions. The IRS views these premiums as personal expenses, so they do not provide tax advantages on life insurance like those seen with certain other types of allowable deductions, such as mortgage interest or qualified medical expenses. As a result, life insurance premium tax-deductible options are typically unavailable for personal policies.

Life insurance is not a legal requirement at the federal or state level. This sets it apart from other types of insurance, such as auto insurance or health insurance, which may offer some tax benefits under specific conditions. This lack of mandate contributes to the limited life insurance tax benefits and means that most individuals cannot claim a life insurance tax deduction.

According to the IRS, a tax deduction is an amount that “can reduce the amount of your income before you calculate the tax you owe.” It incentivizes specific financial activities, such as investing in retirement accounts or making charitable contributions. Claiming deductions can effectively decrease tax liability.

The IRS offers two main types of deductions: the standard deduction, which varies based on your filing status, and itemized deductions, which allow you to list individual expenses. The choice between the two depends on which option results in a lower taxable income. Some common tax deduction examples include charitable contributions, education expenses and certain retirement vehicles, like a traditional IRA.

While life insurance tax benefits are not typically available through these deductions, understanding how other expenses can be deducted helps maximize your tax savings.

Life insurance is tax deductible in some instances. If you meet any of these circumstances, you might get a life insurance deduction by claiming it on your tax return.

Life insurance is a business expense when an employer pays the premiums. If you are a business owner, you can deduct life insurance premiums you pay on behalf of your employees or corporate officers, as long as the company is not a policy beneficiary, whether directly or indirectly.

You can write off life insurance as a business expense on the first $50,000 of life insurance benefits for an employee on group life insurance coverage, as long as the amount is not part of their compensation.

The IRS allows life insurance premiums as a tax deduction in certain situations for alimony and separate maintenance agreements made before January 1, 2019. If a judge ordered either spouse to purchase life insurance as part of an alimony agreement, the payments and life insurance premiums may be tax deductible.

Policies purchased before the divorce, even if the ex-spouse remains the beneficiary, do not qualify for this deduction. Similarly, agreements enacted after December 31, 2018, do not receive these benefits due to amendments introduced by the Tax Cuts and Jobs Act of 2017, which altered the tax advantages of life insurance related to divorce settlements.

A life insurance policy might also be tax deductible if the policy ownership is transferred to a charitable organization or the institution is named the beneficiary. The premiums you pay for both term and whole life insurance are tax deductible in these cases. This setup provides term and whole life insurance tax benefits, as the smaller of the premiums or cash value of the policy may be eligible for a tax deduction.

Transferring ownership of a whole life insurance policy is different from surrendering it for the cash value, which could trigger a tax obligation for the amount greater than the total premiums paid toward the policy.

Although beneficiaries don’t typically pay taxes on death benefit proceeds, there are some situations where you do have to pay tax on a life insurance policy:

Knowing the instances when tax liabilities arise can help policyholders and beneficiaries better understand life insurance tax exemption rules. It also allows you to better manage the tax benefits of life insurance and anticipate any potential payments.

While life insurance premiums are generally not tax-deductible, there are other tax-related aspects to consider that will enhance your understanding of life insurance tax advantages. This knowledge can help you make more informed decisions about your life insurance policy and its role in your broader financial strategy.

Death Benefit Taxation

The death benefit payout is generally a tax-free life insurance feature, so your beneficiary will receive the full face value of the life insurance policy once a death claim is approved. This ensures that they can use the funds for various needs, such as paying bills, covering debts, replacing income or any other expenses. This is why it is important to choose your beneficiary wisely, especially if you have specific ways you want the death benefit to be used.

Cash Value Growth

If you have a cash value life insurance policy, the cash value grows tax-deferred. You won't owe taxes on the gains as long as the money remains within the policy. This is one of the key tax benefits of life insurance.

Loans Against Cash Value

Loans taken against the cash value of a life insurance policy are generally not taxable. This allows you to access funds without incurring a tax liability.

Business-Related Premiums

Most personal life insurance premiums aren't tax deductible. However, life insurance premiums may be considered a deductible business expense in certain scenarios, like when policies are used to fund buy-sell agreements or the business is contractually obligated to maintain a life insurance policy.

Estate Tax Considerations

While the death benefit is generally income tax-free, it may still be subject to estate taxes. Establishing an irrevocable life insurance trust can help mitigate this, ensuring the life insurance is tax-free.

Annuity Options

Some life insurance policies offer annuity options that can provide a stream of income. The tax treatment of these annuities can vary, so it's essential to understand the specifics.

Gift Tax Implications

If you're transferring a life insurance policy to someone else, be aware that this could trigger gift tax implications. The rules can be complex, so consult a tax advisor for guidance.

Dividends

Some whole life policies pay dividends. While these are generally not taxable, different rules may apply if you receive them in cash. Consulting a tax advisor is recommended.

While life insurance premiums may not offer tax deductions, other types of insurance and related expenses can provide some tax relief. Below are some other insurance-based tax deductions that you can take.

Disability insurance replaces part of your income if you are hurt or sick and unable to work. Your employer typically offers these policies. Short-term disability policies can pay for up to two years, while long-term disability can pay up to age 65. If you pay your premiums post-tax, your benefits are not taxable. If you pay them pre-tax, they are considered taxable income.

If you are disabled as defined by the government and meet Social Security guidelines, you may be eligible for Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI). To qualify for Social Security Disability benefits, you must meet work history requirements for SSDI or a means test for income to qualify for SSI.

Medical expenses are costs you incur for the cure, diagnosis, mitigation, prevention or treatment of a disease. If medical or dental expenses for yourself, your spouse or your dependents are greater than 7.5% of your adjusted gross income (AGI) on your tax return, the excess is eligible for a tax deduction as defined by the IRS.

If you're facing medical debt, there are ways to reduce your liability and strategies to reduce your medical bills and other related expenses. There are also government programs offering health insurance for children if you need child-only health insurance coverage.

If you have a high deductible health plan (HDHP) and meet other IRS qualifications, you likely qualify for a Health Savings Account (HSA). Many employer medical plans are HDHP, as are some plans available on the Health Insurance Marketplace.

There are several tax advantages to an HSA. Employer contributions do not count toward gross income. Any contributions you or someone other than your employer makes to your HSA are tax-deductible, even if you don’t itemize your return. Earnings and interest grow in the account tax-free, and distributions will remain tax-free as long as they are used to pay qualifying medical expenses.

Self-employed insurance deductions are specific to self-employed individuals. They include deductions for health insurance premiums and qualified long-term care premiums for the individual, their spouse and dependents.

To be eligible for self-employed insurance deductions, the business owner must meet certain IRS guideline specifications, such as earning a net profit that is reported for the tax year on Schedule C, F or K-1.

Unemployment compensation is income you receive while unemployed. In general, unemployment compensation is considered taxable income according to the IRS. You can either pay quarterly estimated tax payments, request that voluntary withholding for federal income tax be taken from your unemployment benefits or pay the amount when you file your tax return. However, you may incur additional late payment fees if you choose the last option.

The IRS has an Interactive Tax Assistant tool you can use to determine if your unemployment compensation is taxable income. Knowing how to manage your money when you’re unemployed can help set you up for success throughout the year.

MoneyGeek answered some of the most frequently asked questions about life insurance tax deductions to help you navigate this topic.