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Can you deduct life insurance premiums from your taxes?
When you have life insurance, your loved ones will receive a death benefit when you die. In order to keep your policy in force, ensuring that life insurance company correctly makes the payout, you need to make monthly or annual payments to the life insurance company. These payments are called premiums.
Policygenius makes it easy to compare life insurance rates until you find one that fits your budget. While usually affordable, premium payments do add up. You may wonder if you can deduct your premiums from your taxes, as you can sometimes do with health insurance premiums. Unfortunately, with rare exceptions, life insurance is not tax-deductible.
Tax deductions are dollar amounts you can subtract from your taxable income when you file your tax return each year. If you earned $50,000 in taxable income and take $1,000 in tax deductions, you only have to pay taxes on $49,000 of your income. In health insurance, you can deduct your health insurance premiums as medical expenses if they exceed 10% of your adjusted gross income. But the picture is more complicated for life insurance.
Read on to learn more about when you can and can’t deduct your life insurance premiums from your taxes.
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Learn more about how to deduct premiums from your taxes
Life insurance is usually never tax-deductible. That’s because it’s considered a personal expense, like purchasing a product. No state mandates that you buy life insurance, as federal law requires for health insurance.
But the upside is that when you die and your beneficiaries receive the death benefit, the payout will be tax-free if you paid the premiums yourself. That is, the death benefit is not considered income for the sake of filing taxes.
The tax law governing life insurance is similar to disability insurance. Disability insurance premiums are also not tax-deductible, and, like life insurance, if you paid for them with your own after-tax income, then the benefits will also be paid to you tax-free.
There are rare cases in which you can deduct your life insurance premiums from your taxes.
Certain business types, like S corporations, can deduct the life insurance premiums for policies they buy for their employees. These deductions apply only to the first $50,000 in coverage, which is a relatively small amount when you consider that life insurance coverage often exceeds $1 million.
In order to claim this deduction, you can’t be the beneficiary of any of these policies.
Sometimes, the terms of your alimony agreement specify that you need to purchase a life insurance policy with your ex-spouse as the beneficiary. When this happens, the premiums may be tax-deductible.
Life insurance pays out when you die and your beneficiaries receive a death benefit. Under normal circumstances, your beneficiaries will not have to pay taxes on the death benefit. But there are other instances in which you can receive money from life insurance while alive, and in those cases, you may have to pay taxes.
Most people need only a term life insurance policy, which stays in force only until the term expires. But other people may prefer a whole life insurance policy, which has a cash-value component that could gain interest. You may have to pay taxes on any accumulated interest.
It’s possible to sell your life insurance policy. In return, you’ll get cash now and, when you die, the buyer will receive the death benefit that would otherwise be paid to your beneficiaries. If you’re the buyer of a life insurance policy – called a life settlement – you may have to pay taxes on part of the death benefit.
The cash-value component of your whole life insurance policy may be withdrawn. Called a cash surrender, this will deplete your death benefit, but it could be useful if you need money in a pinch. However, you’ll need to pay taxes on the cash-surrender value for any amount in excess of the total premiums you’ve paid.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.