Is Life Insurance Tax Deductible?

Underwritten by United of Omaha Life Insurance Company

01.28.2026 | Category: Costs and Calculators

An older couple walks and smiles at each other while walking through a park, discussing whether their life insurance is tax-deductible.

Summary: Life insurance is generally not tax deductible, but exceptions exist for certain business, alimony or charitable situations. While death benefits are usually tax-free, specific circumstances, like interest earned or estate inclusion, can trigger taxes.

In this article:

When are life insurance premiums tax-deductible?
When is life insurance taxable?
Understanding your tax responsibilities
Frequently asked questions about life insurance and taxes

In most cases, life insurance is not tax-deductible. Unlike health insurance payments, your premium for a life insurance policy is viewed as a personal expense. Personal expenses are typically things like groceries, rent and entertainment, which can’t be subtracted from your yearly income. This is true even if you pay for your spouse’s life insurance.

Life insurance payouts are also usually not taxable, as the IRS doesn't consider them income. However, in both premiums and payouts, some exceptions can be made, depending on how the life insurance was purchased, how it’s being used, who the beneficiaries are and other factors.

Below is more on what you need to know about when you can deduct life insurance premiums and when death benefits may be taxed.

When are life insurance premiums tax-deductible?

In general, life insurance premiums aren’t tax-deductible for individuals. However, it may be taxed if the premium is considered alimony, a business-related expense or a charitable contribution.

Alimony

Alimony is the legal obligation that one spouse has to provide financial support to the other after a legal separation or divorce. If alimony includes paying life insurance premiums, you may be able to deduct it from your taxable income.

Business-related expenses

Business-related expenses can include life insurance if you’re an employer that offers group-term life coverage to employees. The first $50,000 in premiums can be deducted and won’t count as income to employees.¹

Non-qualified plans, like deferred compensation or executive bonuses, are also business-related expenses that could exempt life insurance premiums from being taxed. Compensation for key executives might include life insurance, which is tax-deductible for a company that qualifies.

Charitable contributions

Charitable contributions are another option for having a tax-deductible life insurance plan.

When you purchase a life insurance policy, you pay a premium that’s based on the life insurance plan’s total cost. If you donate your life insurance policy to a charity of your choice, you’re entitled to an immediate charitable deduction for income tax purposes. You will be able to deduct the remaining premiums as charitable donations.

In the event of your death, your life insurance will be donated to that charity. If this option sounds good to you, discuss with a tax advisor to learn more about how to implement it.

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When is life insurance taxable?

You might be wondering, “Is a life insurance payout taxable?” In most cases, beneficiaries aren’t taxed on the payout because the money received from a life insurance policy isn’t viewed as taxable income.²

So, when is life insurance taxable? Below is when there might be a life insurance tax on payouts.

Interest earned

While some beneficiaries may receive their proceeds in a lump sum payment, some may opt for installment payments instead. In that scenario, the insurer holds the principal in an interest-bearing account as it makes payments to you over time. Any interest the account earns could be taxable, although the original life insurance death benefit isn’t.

Estate as beneficiary

There may be taxes owed if the life insurance benefit is paid to an estate. Sometimes people do this intentionally by naming their estate as a beneficiary. Other times, it's unintentional, such as in cases when the policy owner:

Outlived the beneficiaries and forgot to name new ones.

Passed away together or soon after the beneficiaries, such as in an accident. They may not have had enough time to update the policy.

Transferred ownership of the policy, such as to another person or an irrevocable life insurance trust, and passed away within three years of the policy transfer. ³

If no one named on the policy can claim the death benefit, the proceeds go into probate and become part of the estate. This could push the estate’s value over the federal estate tax threshold so that your estate would owe taxes after you pass away. The threshold is adjusted annually, but in 2025, estates valued over $13.99 million may owe federal estate taxes. ⁴

Accelerated death benefit

Accelerated death benefits generally aren’t taxable unless the insured doesn’t meet the IRS definition of terminally ill or chronically ill. Here’s what these terms mean to the IRS. ⁵

Terminally ill: A physician certified that you are likely to pass away within 24 months because of your illness or physical condition

Chronically ill: A licensed healthcare practitioner annually certifies that you can’t perform at least two activities of daily living (ADL) without substantial help. Basic ADLs can include: ⁷

Eating

Bathing

Dressing

Personal hygiene and grooming

Toileting and continence

Moving or transferring from one spot to another

Or, the physician may instead certify that you need substantial supervision for your safety because of a severe cognitive impairment.

Three parties on a policy

Sometimes a policy can have three different people on it:

The policy owner

The insured

The beneficiary

When this happens, the IRS sometimes sees the death benefit payout as a gift from the policyholder to the beneficiary. Any amount over $19,000 in 2025 would trigger a gift tax.4 The easiest way to avoid this is to have only two parties listed on the policy.

Policy surrender

When you surrender a policy, the insurer pays you its cash surrender value and cancels the policy. If you surrender a permanent policy for cash, you may owe taxes on any amount you receive that’s above what you paid in premiums. The cash surrender value is your policy's built-up cash value minus any fees or loans.

For example, if you paid $20,000 in premiums and received $30,000 after surrendering, the $10,000 gain is typically considered taxable income. The insurance company may issue a Form 1099-R reporting the taxable portion.

Life settlements

If you sold your life insurance policy as part of a life settlement, your proceeds from the sale may be taxable. It’ll depend on how much the policy sold for, how much you’ve paid in premiums, the policy’s surrender value and other factors.

The new policy owner will also have to pay taxes when they receive the death benefit if the payout is higher than the total of the policy's purchase price, paid premiums and other costs.²

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Understanding your tax responsibilities

In most cases, life insurance isn't tax-deductible, and payouts to your beneficiaries are tax-free. But exceptions exist, such as if a policy is tied to a group-term life coverage or has your estate as the beneficiary.

If you don’t yet have a life insurance policy and are considering buying coverage, it's important to make sure you’re choosing the right amount. A life insurance calculator can help you estimate how much you may need based on your financial goals. Check out our calculator below.

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Frequently asked questions (FAQs)

Can I deduct life insurance premiums if I’m self-employed?

No, self-employed individuals generally can’t deduct life insurance premiums, even if you view them as part of your business expenses. The IRS treats life insurance premiums as personal costs

unless you’re also an employee or corporate officer of the company and the company isn’t a beneficiary.⁶

What happens if I pay someone else’s life insurance premiums?

Paying someone else’s premiums may be considered a gift by the IRS. If the total exceeds the annual gift tax exclusion ($19,000 in 2025), it could trigger a gift tax reporting requirement.⁴

Do I have to report life insurance proceeds on my tax return?

In most cases, no, you don’t need to report life insurance death benefits as income. However, if you earn interest on the payout or receive a life settlement, the taxable portion must be reported to the IRS.