In today’s post, we will tackle this question: Are life insurance premiums tax-deductible?
Life insurance benefits are generally not tax-deductible, except for some business owners. The life insurance company must pay a death benefit if you die.
You decide who gets the gain in advance, and then all you have to do is keep the plan working via regular payments.
The premiums are the quarterly (or annual) contributions you make to maintain an active policy. Usually, premium rates are manageable — particularly with term life insurance — but over time, the premiums will add up.
However, with rare exceptions, the life insurance premiums are not tax-deductible. When you buy a policy for yourself (meaning it pays off after your death), you can never subtract life insurance premiums from your taxes.
The only exceptions are when you pay a premium for the rule of someone else.
Even though they can subtract other costs, such as health insurance premiums, self-employed people cannot deduct their premiums.
On the flip side, the individual (your beneficiary) who gets a death benefit does not have to pay taxes from the money they receive. You don’t have to pay taxes on that $1 million unless you earn a $1 million death benefit.
Why Life Insurance Isn’t Tax Deductible?
Typically, life insurance is not tax-deductible because it is considered a private expense, just like buying clothes or any other item.
You do not need to purchase life insurance from either the federal government or any state. (This is why disability insurance payments are also not tax-deductible.)
The downside is that when you die and the beneficiaries claim the death benefit, the payment is tax-free because you pay the premiums yourself. An interest paid on your income tax return is not considered income.
Read this guide: Top Insurance Companies In Ghana.
What Is A Tax Deduction?
It is a deduction from income tax limits on how much of the income you have to pay tax.
You are usually eligible for tax deductions if you spend money on certain items throughout the year such as mortgage interest, so you can compensate for that expense on your tax return by excluding it from your taxable income.
If you have $50,000 in taxable income but qualify for $5,000 in tax deductions, you only have to pay taxes on $45,000 of your income.
Are Life Insurance Premiums Taxes Deductible For A C Corporation?
It is listed as a nondeductible cost under the Internal Revenue Code 264 for life insurance purchased by a C corporation.
Life insurance, therefore, owned by the owner and paid for by the C corporation, is regarded either as wages or dividends as a taxable fringe benefit.
Related article: MiLife Insurance Ghana Guide.
Is Life Insurance Premium Tax-Deductible For An S Corporation?
Life insurance premiums are deductible only if life insurance is sold as an employee benefit by the S corporation.
The employer will not be taxed on these incentives because the premiums on the W-2 of the worker will be exempted from the salary page.
Nevertheless, the S company must also provide community life insurance rather than insurance to just a few main executives to exclude the premiums from salaries.
The premiums must be classified as salaries if the program benefits key people.
If an S corporation pays a single employee with more than $50,000 in compensation, the company must disclose amounts paid more than $50,000 as salaries on a theW-2 form of the worker.
When the S company is a program recipient, the premiums are not deductible. It involves life insurance policies owned by companies that have been paid out for the benefit of employees.
Read also: Ultimate Guide To Bingle Car Insurance.
Are Life Insurance Premiums Tax-Deductible For A Business Owner?
The premiums you charge on life insurance policies for your parents in case of death are not tax-deductible. In case you pay the premiums from your company checking account.
And, if you have a life insurance policy to cover your business assets, tax-deductible is the life insurance premium.
So, as a business expense, premiums are deductible only when the insured is the company’s employee, and the company is not the policy beneficiary.
You should, therefore, be able to deduct life insurance premiums on your 1040 Schedule C.
Are Life Insurance Premiums Taxes Deductible If The Beneficiary Is A Charity?
The exclusion is limited to the latter of the fair market value and the basis of the agreement when donating a life insurance policy.
In this simple explanation, what should be very evident is that cash value is not inherently an important data point, at least as the policyholder usually thinks it is.
You can imagine that this can become a real issue when a donor discovers that the pledged policy with a cash value of $100,000 is, in reality, a very well-seasoned life-long plan with only a $10,000 basis after the donation.
According to the principle above, the deductible amount would be the smaller of the FMV, which we’re going to call $100,000, and the $10,000 foundation.
That is often not the intention of the donor. Most donors are supposed to receive a deduction of $100,000. By and large, net premiums will be the basis of the contract less any non-taxable benefit deductions or distributions.
This will, in many cases, simply be the total premiums charged over the years into the agreement.
If the policy’s cash value is less than the basis, then we’re dealing with an even lower number, and even the premiums paid into the agreement don’t have a deduction accessible.
This would probably be the case for relatively new plans and life insurance policies that are underfunded and poorly handled.
Are Life Insurance Premiums Taxes Deductible For A Partnership?
You cannot cancel life insurance premiums if you take out an insurance policy on your own life as a partner in a business partnership and appoint your spouses as beneficiaries.
When you take out a life insurance policy (or another person’s life with a financial interest in your business) to get or cover a business loan, the life insurance premiums cannot be deducted as a business expense.
You cannot subtract the premiums either as interest on business loans or as a funding loan cost. The policy’s benefits are usually not taxed as income in the event of death, even if they are used to liquidate the debt.
Is Life Insurance Premiums Tax-Deductible For LLC?
While the Internal Revenue Service requires LLCs to deduct some forms of insurance premiums as business expenses, sadly, they are not eligible for life insurance premiums.
But if you are the holder of an LLC, it may be deductible for these premiums. Keep in mind that this is not true if the insurance helps the business owner or LLC.
Are Life Insurance Premiums Taxes Deductible For Self-Employed?
Many people believe it is possible to pay off life insurance as a business expense, but this is unfortunately not true.
The IRS does not accept life insurance as a business cost, so you can’t write off any premiums you’ve paid. That being said, if you use life insurance as a way to protect your business assets, your premiums may be tax-deductible.
Are Life Insurance Premiums Taxes Deductible For Individuals?
However, individual life insurance premiums are not tax-deductible. Unlike an IRA or equivalent savings account for retirement, life insurance policies are considered personal costs rather than tax deductions.