Is Life Insurance Tax Deductible?

No, 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. But, there are exceptions that can be made, depending on how the life insurance was purchased or how it’s being used.¹

What are the exceptions for life insurance to be tax deductible?
Life insurance may be deductible if it’s considered alimony, a business-related expense or a charitable contribution.

Alimony is the legal obligation that one spouse has to provide financial support to the other after a legal separation or divorce.² If alimony includes paying life insurance premiums, you may be able to deduct it from your taxes.

Business-related expenses can include life insurance if you’re an employer that offers group-term life coverage to employees.³ The first $50,000 in premiums can be deducted and won’t count as income to employees. Non-qualified plans, like deferred compensation or executive bonuses, are also business-related expenses that could exempt life insurance from being taxed. Compensation for key executives might include life insurance and so is tax deductible for a company that qualifies.

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 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 and 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.⁴

Are the beneficiaries of life insurance policies taxed?
No, beneficiaries aren’t usually taxed on the payout from a life insurance policy. In most cases, the money received from a life insurance policy isn’t viewed as taxable income. Life insurance beneficiaries may be taxed on the money received from the policy if:⁴

• The life insurance policy wasn’t paid out immediately, and the money is held with the insurance company where it collects interest.
• The life insurance benefit is paid to an estate. This usually happens when the owner of the life insurance policy outlives their primary beneficiary and doesn’t update their policy.

Speak to a tax advisor
Overall, life insurance is not usually tax deductible. Talk to a professional tax advisor if you have questions or want to learn more.

Sources:
1 Zacks.com. Web page: Is My Life Insurance Policy Premium Tax Deductible? Retrieved on May 3, 2018 from https://finance.zacks.com/life-insurance-policy-premium-tax-deductible-1694.html.
2 Marriage.com (April 6, 2018). Web page: What is Alimony? Retrieved on May 3, 2018 from https://www.marriage.com/advice/alimony/what-is-alimony/.
3 Dominick, Feld, Hyde, P.C. Web page: Turbocharge Your Charitable Gifts by Donating your Life Insurance Policy. Retrieved on May 3, 2018 from https://www.dfhlaw.com/turbocharge-your-charitable-gifts.php.
4 Investopedia (October 2015). Web page: Do beneficiaries pay taxes on life insurance? Retrieved on May 17, 2018 from https://www.investopedia.com/ask/answers/102015/do-beneficiaries-pay-taxes-life-insurance.asp.

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