Is Life Insurance Tax Deductible?
Life insurance is considered a personal expense by the IRS, so it is not tax deductible. There are exceptions, such as if it is donated to a charity.
Generally, life insurance is not tax deductible. It is an optional personal expense you choose to take on, which usually means it is not deductible. However, in the following instances, you may be able to claim life insurance on your tax return:
- Premiums paid by an employer
- Spousal or child agreements made before 2019
- The policy beneficiary is a charitable organization
In general, the IRS does not allow life insurance to be tax deductible, as it is considered a personal, optional expense
Employers who pay for their employees’ life insurance premiums may be eligible for a tax deduction if they meet certain qualifications.
Life insurance premiums are tax deductible prior to 2019 if the policy is purchased as part of a spousal or child maintenance agreement.
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Why Are Life Insurance Premiums Usually Not Tax Deductible?
Life insurance premiums are usually not tax deductible because they are considered personal expenses. The Internal Revenue Service (IRS) does not consider personal expenses, like food, clothing and life insurance premiums, as deductible. Another reason life insurance premiums are not tax deductible is that life insurance is not a federal or state government requirement.
The death benefit payout is usually not taxable, so your beneficiary will receive the full face value of the life insurance policy once a death claim is approved. Your beneficiary can then use the death benefit to pay bills and debts, replace income or use it in any other way they choose. 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.
What Is a 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.” The more deductions you can apply, the lower your taxable income and the less you will be required to pay in taxes.
Taxpayers may qualify for a standard deduction, which varies by filing status, or they can choose to itemize their deductions, whichever is greater. Other common tax deduction examples include charitable contributions, education expenses and certain retirement vehicles, like a traditional IRA.
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When Is Life Insurance Tax Deductible?
Life insurance is tax deductible in some instances. If you meet any of these circumstances, you might get a life insurance deduction by claiming the life insurance on your tax return.
Life Insurance Benefit From Employer
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 the employee’s compensation.
Alimony & Other Agreements Made Before 2019
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 the agreement for alimony, both the alimony payments and life insurance premiums may be tax deductible.
This is not the case for policies purchased before the divorce, even if the ex-spouse is the beneficiary or in any case in which the agreement is effective after December 31, 2018, due to tax code changes in the Tax Cuts and Jobs Act of 2017.
Life Insurance Beneficiary Is a Charitable Institution
A life insurance policy might also be tax deductible if the policy ownership is transferred to a charitable organization or the institution is named as the beneficiary. The premiums you pay for term life insurance are tax deductible in either case. Whole life insurance is tax deductible, as well, in this situation.
The smaller of the premiums or cash value 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 into the policy.
When Do You Have to Pay Taxes for Life Insurance?
Although beneficiaries don’t typically pay taxes on death benefit proceeds, there are some situations where you do have to pay taxes for life insurance:
Selling your own policy
If you sell your life insurance policy, the amount you get may be considered taxable income.
Surrendering permanent life insurance for cash
If you surrender a permanent life insurance policy, you might pay taxes on the surrendered amount that is greater than the premiums you paid into the policy.
Withdrawing from your policy’s cash account
If you withdraw money from your life insurance policy’s cash value account, you may pay taxes on the withdrawn amount.
Beneficiaries receiving death benefits through installments
When a beneficiary chooses to receive the death benefit through installments rather than a lump sum, any interest earned on the unpaid death benefit may be considered taxable income.
Other Insurance-Based Tax Deductions
There are some other insurance-based tax deductions that you can make.
Disability insurance replaces part of your income if you are hurt or sick and unable to work. These policies are typically offered by your employer. 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, but 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.
You can navigate ways to get out of medical debt 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
Self-employed insurance deductions are deductions specific to individuals who are self-employed. These deductions include health insurance premiums for medical and dental insurance as well as 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 guidelines, such as earning a net profit that is reported for the tax year on Schedule C or F or as a partner with net self-employment earnings for the given tax year reported on Schedule 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 voluntary withholding for federal income tax be taken from your unemployment benefits or pay the amount when you file your tax return, though 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.
Life Insurance Tax Deductions FAQ
Tax deductions for life insurance can be complicated, but answers to some of the most frequently asked questions about life insurance tax deductions can help you navigate this topic.
About the Author
- Internal Revenue Service. "Credits and Deductions." Accessed November 22, 2022.
- Internal Revenue Service. "Publication 535 (2021), Business Expenses." Accessed November 22, 2022.
- Internal Revenue Service. "Publication 969 (2021), Health Savings Accounts and Other Tax-Favored Health Plans." Accessed November 22, 2022.
- Internal Revenue Service. "Topic No. 418 Unemployment Compensation." Accessed November 22, 2022.
- Internal Revenue Service. "Topic No. 502 Medical and Dental Expenses." Accessed November 22, 2022.
- USA.gov. "Benefits and Insurance for People with Disabilities." Accessed November 22, 2022.