Are Life Insurance Premiums Tax Deductible?
Last updated: July 20th, 2022
Reviewed by
Grant Desselle
Licensed Insurance Agent
While premiums on long-term investment vehicles like an HSA or IRA are deductible, life insurance is a different story.
It pays off, in the long run, to understand whether you qualify for these few situations. This can keep you out of hot water and give you peace of mind for tax season.
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Essentially, if you deduct your premiums, it makes all of your death benefits taxable.
If you still wind up deducting those premiums, then you can land yourself in a sticky situation that will cost you more money in the long run. Consider a person who has a million-dollar policy. If they deduct their premiums from their income tax returns, then death benefits become taxable. This means their beneficiaries will have to pay roughly 30% in taxes, totaling around $300,000. In the end, this is $300,000 that they wouldn’t have to pay otherwise.
Considerations like this drive home the importance of understanding your options, so you don’t leave costly mistakes for your family. In essence, not deducting the premium helps keep the benefits tax free.
What are the exceptions for individuals?
For individuals, the bad news is that their life insurance premiums, for the most part, aren’t tax deductible. Here are the two primary exceptions for tax deductible life insurance:
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Alimony:
Spouses paying court-ordered alimony can purchase a life insurance policy to cover payments in the event of their death. The premiums for this type of policy are tax deductible.
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Charity Owned Life Insurance:
The same is true of a life insurance policy owned by a charity. The insured makes donations to the charity equal to their premiums and then deduct the premiums.
These are the only two primary situations for individuals who can deduct life insurance premiums. Otherwise, the premiums are not deductible.
Often, people think that running a business entitles them to premiums that are deductible as a business expense, but that isn’t actually the case. See if your business qualifies to deduct life insurance premiums as a business expense.
Are life insurance benefits taxable?
No. Life insurance benefits are not taxable in most situations. But, the benefits become taxable if you deduct your premiums.
Conclusions
While deducting life insurance premiums may seem like it should be straightforward, it really isn’t. Tax codes make it difficult to know what deductions are and aren’t eligible, so it pays to do your research.
If you still have questions about your eligibility for deductions, finding professional help is much cheaper than making expensive assumptions. We are here to help.
See what you qualify for by answering some health questions.
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Brian is the founder and CEO of Insurist and carries Life, Health, and Property & Casualty licenses in all 50 U.S. states. Since 2013, Brian has been a member of Million Dollar Round Table, a designation for the top 1% of financial advisors worldwide. Brian has been featured in Yahoo! Finance, Money.com, Entrepreneur.com, Life Happens, Forbes, MSN, and Good Financial Cents. Brian’s goal is to show customers the best products, the quickest answers to their questions, and provide expert advice.
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Grant's past experience includes work as a licensed sales agent for Hagerty Insurance. He has reviewed thousands of existing auto policies across the nation and issued hundreds of new ones on everything ranging from classic cars undergoing restoration to modern exotics and motorcycles.
