- Life insurance premiums are generally not tax-deductible.
- However, if life insurance is a business expense, premiums may be tax deductible.
- Life insurance premiums may also be deductible if the beneficiary is a charitable organization.
- Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »
One advantage of life insurance is the tax-deferred benefits — you pay taxes when withdraw the money, not up front. Additionally, you do not have to pay taxes on proceeds from a life insurance payout. However, the premiums you pay on life insurance policies are usually not tax-deductible, except in certain circumstances.
Are life insurance premiums tax-deductible?
The IRS considers life insurance premiums a personal expense that is not tax-deductible. However, if life insurance is a business expense, it may be tax-deductible. It is important to speak with your tax professional to determine if your premiums are deductible.
Writing off life insurance premiums as a business expense
Premiums on life insurance policies can be tax deductible if they are a business expense, Mark Williams, CEO of Brokers International , told Insider. He gave the following example:
Two business partners have 50/50 ownership in a business venture with the right to purchase the other's ownership interest in the event of death. They purchased a business life insurance policy and write-off the premiums as a business expense.
If a company offers group life insurance for employees, it may be written off as a business expense. IRS rules "provide an exclusion for the first $50,000 of group life insurance coverage provided under a policy carried directly or indirectly by an employer."
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However, IRS rules state that "you can't deduct the cost of life insurance coverage for you, an employee, or any person with a financial interest in your business if you're directly or indirectly the beneficiary of the policy."
It's important to talk to your accountant to make sure you understand when you can deduct taxes. The IRS has specific rules regarding deducting taxes on life insurance.
Writing off premiums as a charitable contribution or part of an alimony agreement
If you purchase a life insurance policy and make a charitable organization the beneficiary, Fidelity Life said "the premiums you paid into the policy or the policy's overall cash value, whichever is less, is considered a tax deduction."
In certain states, life insurance is required as security for child support or spousal support , Kimberly A. Cook, principal mediator at Dovetail Conflict Resolution , told Insider. Cook suggests not only talking to your divorce lawyer, but also including your estate planning attorney and accountant in these discussions because if life insurance is required in your state that would extend for several years.
If you have a spousal support or alimony agreement that is pre-2019, where the judge ordered life insurance as part of the agreement, you may be able to write off those premiums according to IRS rules . Unfortunately, alimony and spousal support agreements after December 31, 2018 are not eligible.
Life insurance payouts aren't taxable, with a few exceptions
Even if you can't write off premiums you pay on your life insurance, if you are the beneficiary of a life insurance policy, you do not pay taxes on the death benefit . However, there are a few exceptions to this rule.
Mark Williams, CEO of Brokers International , told Insider that one instance where life insurance beneficiaries may have to pay taxes is if the death benefit includes a payout of cash value .
Cash value is a feature unique to permanent life insurance policies . All permanent life insurance policies have death benefits as well as a cash value that grows on a tax-deferred basis. The big difference between the types of permanent life insurance policies is how they manage the cash value — in the insurance company's portfolio, stock market, or annuities.
Williams warned that because the money inside the policy ( cash value ) has been growing on a tax-deferred basis, you will pay taxes on the cash value upon surrendering the policy or if it's paid out to a beneficiary.
It is wise to consult your accountant, lawyer, and financial advisor before making decisions on life insurance to best maximize your tax benefits.
Via PakApNews