Q

Is life insurance tax-deductible?

A

Your personal life insurance premiums are not tax-deductible. Payments made for someone else’s coverage, like employers offering a benefit, are deductible.

To keep a life insurance policy active, you pay premiums monthly or annually. Payments can add up over time, so you might be hoping to receive some tax breaks on the costs.

Unfortunately, your life insurance premiums are not tax-deductible, with rare exceptions. You can never deduct life insurance premiums from your taxes if you bought a policy for yourself (meaning it pays out upon your death). The only exceptions are when you pay premiums for someone else’s policy. Here’s how to know when a policy does qualify for deductions.

KEY TAKEAWAYS

  • Life insurance premiums are considered a personal expense and are not eligible for tax deductions

  • If you paid for someone else’s policy (such as an employee or ex-spouse), you may be entitled to deductions

  • Life insurance proceeds are not considered income and are not subject to taxes

Why isn’t life insurance tax-deductible?

Life insurance usually isn’t tax-deductible because it’s considered a personal expense, just like clothing or other product purchases. Neither the federal government nor any state requires you to buy life insurance.

(This is why premiums for disability insurance aren’t tax-deductible, either.)

The upside is that when you die and your beneficiaries receive the death benefit, the payout is tax-free. A benefit payment is not considered income on their income tax return.

When is life insurance tax-deductible?

There are a couple of cases where you can deduct your life insurance premiums on your tax return. These exceptions apply when you are paying premiums for someone else’s life insurance policy and come with their own restrictions.

When your business offers life insurance as an employee benefit

Owners of certain types of businesses can deduct premium payments they make for their employees, including: 

  • LLCs 

  • S corporations

To qualify, you must provide life insurance as an employee benefit and neither the business owner nor the company can stand to benefit from the policy. 

The benefit may also be ineligible for a deduction if:

  • You are self-employed , also known as sole proprietorship. Even though you can deduct other expenses, like health insurance, life insurance is excluded because you’re paying for your own policy.

  • You offer more than $50,000 in coverage. The IRS treats premiums paid for coverage above this amount as employee wages, which you cannot deduct from taxes.

  • Your spouse is an employee of your company, because you (the business owner) would benefit from their insurance payout.

When you have an alimony agreement that went into effect before 2019

Life insurance tied to divorce proceedings is usually not tax-deductible. The exception is if you have an alimony agreement or divorce decree that both:  

  • Requires you to purchase life insurance on behalf of your ex-spouse

  • Went into effect before 2019

Any alimony agreements that took effect in 2019 or later are not eligible for this deduction because of recent tax code changes. If your alimony agreement says you have to name your ex-spouse as the beneficiary of your own policy, those premiums are not deductible. 

A tax professional can answer any additional questions you have about whether your premium payments are deductible.

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Do you ever pay taxes on life insurance?

Under normal circumstances, your beneficiaries won’t pay taxes on life insurance benefits and you don’t need to pay any taxes on your policy during your lifetime. But there are a few exceptions, which mostly apply to policies with a cash value:

  • Selling your own life insurance policy: You can legally sell your life insurance policy if you no longer need it (also called a viatical settlement). Any profit from the sale is taxed as income.

  • Surrendering permanent life insurance for cash: If you want to give up a permanent policy, you may be able to get some of the cash value funds in return. But if you get back more than you paid into the account (the principal ), that amount is taxable.

  • Withdrawing from your policy’s cash value account: Cash values gain tax-deferred interest like investment accounts. If you want to withdraw from your cash value, you’ll pay taxes on any amount greater than the principal.

  • Your beneficiaries receive the death benefit in installments: One of the few cases when insurance proceeds are taxed is if your beneficiaries opt to receive payments in installments. The unpaid funds may earn interest, and that interest is taxable.

→ Learn more about when life insurance is taxable

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Except for specific circumstances when you’re paying for someone else’s life insurance policy, your premiums are not tax-deductible. If you have questions about the tax implications of your life insurance policy, a licensed financial advisor or insurance agent can give you personalized advice.

Life insurance tax deductions FAQ:

Can life insurance be claimed as a tax deduction?

You can’t claim life insurance as a deduction except in specific cases for business owners or divorcees.

When is life insurance tax deductible for a business?

Life insurance premiums are tax-deductible for business owners who offer life insurance to their employees as a benefit, with some restrictions.

When else is life insurance tax deductible?

Life insurance may be tax-deductible if you’re divorced and a divorce agreement from before 2019 requires you to buy life insurance on your ex-spouse.