Is Life Insurance Tax Deductible?

When you have a life insurance policy, you make monthly premium payments to your life insurance provider to keep the policy active. These are part of your expense commitment each month, so is life insurance tax deductible?

The short answer is no; life insurance premiums are generally not tax-deductible. However, there are a few exceptions to this rule, and life insurance may carry some tax benefits.

With that in mind, Union Risk Services is here to discuss life insurance and tax benefits.

Some Notes Around the Tax Deductibility of Life Insurance

As stated, the answer is mostly “No, you cannot deduct your annual life insurance premiums from your tax returns for the year.” The IRS considers life insurance premiums as a ‘personal expense,’ which means you cannot take tax deductions for life insurance premiums.

Still, three circumstances change this rule. You can fully or partially write off life insurance premium expenses in the following scenarios:

1. You are a business and offer group life insurance to your employees.
2. You are donating your life insurance policy to a charity.
3. You are required to buy life insurance as part of an alimony agreement (pre-2019).

#1 Group Insurance For Your Employees

Employers often provide employee life insurance as part of a benefits package. If you are a small business owner, you may deduct up to a certain amount in group life insurance from your premiums. The IRS treats any premiums paid for more than this threshold as employee wages, which are subject to tax as Medicare and Social Security.

Note that you cannot make deductions if you are self-employed and have a policy through your company. You also cannot take a deduction if your company employs your spouse because that could indirectly benefit the owner (you).

#2 Donating to Charity (They’re Your Beneficiary)

If you plan to donate your policy to a qualifying charitable organization, the IRS will allow you to deduct your life insurance premiums from your taxes. You can deduct both the premiums you paid before transferring your benefits and any premium payments you make afterward.

The amount of premiums you can deduct after transferring your policy may differ. Typically, this depends on whether you pay the insurance company rather than the charitable organization.

#3 Tax Deductions for an Alimony Agreement

Sometimes, alimony agreements may require one party to purchase life insurance. Do you have an alimony agreement implemented before 2019 that required you to buy life insurance? You may deduct those premiums from your taxes.

Note that the IRS rules on life insurance tax deductions changed due to the Tax Cuts and Jobs Act. You cannot deduct premiums on life insurance premiums for alimony agreements made after 2019.

How Estate Planning and Life Insurance Tax Benefits Fit Together

Is life insurance tax deductible? As discussed, the premiums for life insurance are not tax-deductible outside of the three scenarios above. However, generally speaking, the death benefits from your life insurance should be tax-free.

This means your beneficiaries should not have to pay taxes on any money they get from the policy if you die, though there are the following caveats to this general tax exemption:

• Beneficiaries may have to pay some income taxes if they opt to receive the death benefit in installments rather than a single lump sum. The beneficiary only has to pay taxes on any amounts that exceed the policy’s death coverage.
• If you sell your life insurance policy to another individual for something of equivalent value, your beneficiaries may have to pay income taxes on part of the death benefit.
• The IRS has a lifetime limit on inheritance and gift exemptions that increases with inflation. As of 2024, the lifetime estate limit is $13.61 million. If a death benefit puts you over the lifetime limit, you may have to pay estate taxes on the excess amount.

The Matter of Life Insurance “Cash Value” Taxes

Whole or permanent life insurance policies have a cash value component that accrues value over time. As long as the cash value remains in the policy, the IRS won’t tax you on its principal or growth.

That changes with the following scenarios:

• If you surrender the policy to access the cash value, you will have to pay ordinary income taxes on any amount accrued from interest.
• If you withdraw an amount that is less than the total amount invested in the policy, the IRS will not treat it as taxable income.

How does this work? Let’s say you have a policy with a cash value of $30,000, and you have already paid $20,000 in premiums. If you withdraw less than $20,000, you won’t have to pay income taxes. If you withdraw the entire amount, you’ll only pay tax on the remaining $10,000.

Life Insurance Tax Implications FAQ

Below are some of the most common questions we receive about the insurance industry and the tax implications for life insurance.

Do I Have to Report Life Insurance on My Taxes?

No, you do not have to report life insurance payments on your tax returns. The IRS classifies life insurance premiums as a personal expense (they make no difference to your taxation).

What Is a 1099-R Form for Life Insurance?

If you either fully or partially surrender a life insurance policy for the cash value, you may have to fill out a 1099-R tax form to report the income. You won’t have to fill it out if you withdraw less than the total premiums paid into the plan.

Do I Have to Pay Taxes on a Life Insurance Loan?

If you take out a loan against the cash value of your life insurance policy, you do not have to pay taxes on the amount as long as it is less than the total value you have paid into your policy.

Alternative Insurance Strategies for Businesses

Is life insurance tax deductible in your specific situation? Read our blog to learn about the benefits of personal lines insurance, or request a comprehensive risk assessment from our Union Risk Services experts online. You can also call (718) 370-3131 to get in touch!