Are life insurance premiums tax-deductible?
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BLUEPRINT
Updated 8:59 a.m. UTC March 14, 2024
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Key points
- Life insurance premiums are not tax-deductible for most people.
- If you’re a business owner and premiums for your employees are a business expense, they may be deductible.
- Life insurance payouts are typically not taxed, though if the deceased person’s overall estate is very large they may be subject to estate tax.
- The cash value of whole life insurance policies is tax deferred and can typically be withdrawn tax-free, with some exceptions.
If you’re considering taking out a life insurance policy, or are the beneficiary of one, you may be wondering whether life insurance premiums are tax-deductible. Probably not, as the Internal Revenue Service considers the payments a personal expense, like clothing.
There are exceptions, and we’ll dive deeper into those below. We’ll also break down the tax implications of life insurance policies—premiums, payouts and the cash value of whole life policies.
Learn more about life insurance: The best life insurance companies
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Taxes and life insurance premiums
The monthly payment for your life insurance policy is known as a premium. If you get life insurance through your employer, the premium may be deducted from your paycheck. If you have a policy outside of your employer, you most likely pay your premium directly to the insurance company.
For the most part, if you’re seeking tax deductions (deductions can reduce the amount of your income before you calculate the tax you owe), it probably won’t help you to look at your life insurance premiums.
“In the vast majority of cases, life insurance premiums for individuals are not tax-deductible,” says R.J. Weiss, a Certified Financial Planner and founder of The Ways to Wealth.
Tip: The IRS views life insurance as a personal expense, like many of the things we buy every day, and those are not deductible.
However, if you run your own company, you may be able to get a tax break on your life insurance premiums—if your situation meets certain criteria and you don’t exceed certain limits.
“Premiums may be tax-deductible if the policy is purchased as part of a business, and the premium payments represent a business expense,” Weiss says.
Let’s say you’re a small business owner with 20 employees, and you offer each employee a life insurance policy for the amount of their annual salary. For employees who earn less than $50,000 and have a life insurance policy for that amount, employers can deduct the cost of the premiums.
For employees who earn more than $50,000 and are offered life insurance for the amount of their annual salary, they will have to pay income taxes on the premium coverage above $50,000. The premium for the first $50,000 is covered.
One important exception to the rule is that you cannot deduct premiums for any life insurance policy where you or your company are the beneficiary.
Taxes and life insurance payouts
If you receive a life insurance payout when someone dies, you probably don’t have to pay taxes on it.
“The death benefit aspect of a life insurance policy is most often not considered taxable income,” Weiss says.
Another thing to keep in mind is that when you die while covered by a life insurance policy, the death benefit will be counted as part of your estate. If you’re a high-net-worth individual, that’s something to consider as you do your estate planning.
“Life insurance proceeds can be hit with estate taxes if the total value of one’s estate surpasses federal and state limits,” Weiss says. The federal limit for 2022 is $12,060,000. If the total value of your estate, including your life insurance policy or policies, exceeds that amount, the IRS will collect estate taxes.
“Many wealthy individuals avoid or reduce this tax by creating an irrevocable life insurance trust (ILIT),” Weiss says. This type of trust, which cannot be changed or revoked, can prevent life insurance death benefits from being included in the estate calculation, which can save your beneficiaries money.
Taxes and life insurance cash value
If you have a whole life insurance policy, it most likely has a cash value component, a sort of savings account. As time passes and you continue making your premium payments, the cash value will grow. You can use the cash value to pay your premiums, make withdrawals for other expenses or as collateral for a loan.
There is no tax on the growth of the cash value over time—it grows tax-deferred, meaning your money grows faster because it’s not being reduced by taxes each year. Withdrawals of your cash value are also typically tax-free, unless the amount you take out is more than the total you’ve paid into the policy.
The tax rules around life insurance policies spelled out above will apply for the majority of people. But there are many different types of life insurance, and each will have nuances in its terms. When in doubt, tap your plan administrator, life insurance agent or financial planner for guidance.
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