Are Life Insurance Premiums Tax Deductible?

Life insurance: it’s the ultimate “just in case” financial product. It provides a safety net for your loved ones during your untimely death. However, when it is tax time, we often wonder whether our premiums are tax deductible. So, are life insurance premiums tax deductible? Here we explore whether life insurance premiums are tax-deductible and some of the nuances and exceptions that you should be aware of. 

What does tax deductibility mean? 

A tax-deductible expense can be taken off an individual’s or business’s taxable income. This lowers the amount of tax that an individual or company has to pay to the government. In other words, when an expense is tax deductible, the cost of that expense can be deducted from the taxpayer’s gross income when calculating taxable income. 

Therefore, it lowers the taxpayer’s taxable income, lowering the taxes owed to the government. For example, charitable contributions, mortgage interest, and certain business and medical expenses are tax-deductible. 

Life Insurance and Taxes 

Several tax benefits to life insurance can help you protect your family’s finances and save money on taxes. Most of the time, your beneficiaries won’t have to pay taxes on the death benefit received, and in addition, the cash value of some types of policies can grow tax-free.  

Therefore, one can note a few points while looking at life insurance and taxes.  

• You cannot deduct the cost of your life insurance premiums on your federal income tax return. 
• You may be able to deduct the premiums as a business expense if you are self-employed if you purchase it as a business expense.  
• The death benefit paid out to your beneficiaries is generally not subject to federal income tax. 
• If the loan is taken out against the cash value of the policy, take out a loan the interest paid on loan may be tax deductible if the loan is used for a qualified expense. 

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Are life insurance premiums tax deductible? 

Life insurance premiums are not tax deductible for most of them. In other words, life insurance premiums are categorized as personal expenses and are not tax deductible. Therefore, the life insurance policy you buy and your premiums are just another product, not tax deductible. However, the death benefits paid out to the beneficiaries are tax deductible.   

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When should I pay taxes for life insurance? 

In addition to life insurance premiums, there are several other situations when you should pay taxes for life insurance.  

• When you sell your policy, the amount you receive is taxable. 
• You will pay tax for the surrendered policy if the amount received exceeds the premiums paid.  
• Since cash value insurance allows you to withdraw from the policy’s cash account, you must pay taxes on the amount withdrawn. 
• Lumpsum death benefits may be tax deductible; however, if the beneficiary receives the amount in installments, the interest on the unpaid amount is taxable.  

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Which are the situations where life insurance is tax deductible? 

There are several instances where life insurance is tax deductible.  

When you receive life insurance benefits from the employer 

When the employer pays life insurance premiums as a part of group insurance, it is considered a business expense. In other words, if the company is not a policy beneficiary, it is considered a business expense and tax deductible.  

Agreements regarding alimony and others prior to 2019 

In some cases, the IRS lets alimony and separate maintenance agreements made before January 1, 2019, deduct the cost of life insurance premiums. If one of the spouses is to buy life insurance as part of the alimony agreement, both the alimony and the life insurance premiums may be tax-deductible. However, this does not apply to the policies brought before the divorce or to agreements after December 2018.    

When the beneficiary is a charity 

Transferring the life insurance policy owner to a charitable organization or designating the organization as the beneficiary could also qualify as a tax deduction.  

Can they deduct tax when a life insurance premium is a business expense? 

Life insurance premiums are deductible if the policy protects a business’s assets. Therefore, premiums are tax deductible only when the insured is an employee and the business is not a policy beneficiary.

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