Are Life Insurance Premiums Tax-Deductible? + FAQs

In most cases life insurance premiums are not tax-deductible on your U.S. federal income tax return.

They’re treated as personal, nondeductible expenses. However, there are important exceptions—especially for businesses—where premiums can become deductible when structured in certain ways. This comprehensive guide breaks down the rules for individuals, small business owners, and corporations, covering when life insurance premiums are deductible, when they aren’t, and why.

We’ll also explore how different types of life insurance (term, whole, universal, group) are treated under tax law, key IRS regulations (like Section 162 executive bonus plans and fringe benefit rules), state-level nuances, plus common mistakes to avoid.

• 💡 Personal policy premiums aren’t deductible: Premiums for your own life insurance (term, whole, etc.) are considered personal expenses, so the IRS won’t let you write them off on your taxes.

• 💼 Business-paid premiums have conditions: Companies can deduct life insurance premiums only if the business isn’t the policy’s beneficiary. For example, group life insurance for employees is deductible, but “key person” insurance (where the company is beneficiary) is not.

• 📝 No double tax benefits: The death benefit from life insurance is tax-free, so the tax code generally denies any deduction for premiums. This prevents a double tax break (deducting the cost and getting tax-free payout).

• 🗂️ Special business arrangements exist: Section 162 executive bonus plans allow a business to deduct premiums by treating them as a bonus to an employee (who then pays taxes on that bonus). Properly structured, this lets owners or key employees get a policy using company funds—legitimately.

• ⚖️ State taxes mirror federal rules: States typically follow the federal lead—no deduction for personal premiums. A few states offer limited credits or incentives (for example, for certain military personnel), but these are rare exceptions, not the norm.

Life Insurance Premiums and Tax Deductions: The Basics

Tax Deduction Defined: A tax-deductible expense is one you can subtract from your income, reducing your taxable income (and therefore your tax bill). Many people know that some insurance premiums (like health insurance in certain cases) might be deductible. It’s natural to wonder if life insurance works the same way. Spoiler: it usually doesn’t.

Why Most Life Insurance Premiums Aren’t Deductible: The IRS considers personal life insurance premiums a personal expense, not a business or income-producing expense. Under federal tax law, personal living expenses are generally not deductible. Life insurance is primarily for the benefit of your family or business in the event of death, but it doesn’t directly relate to earning taxable income.

Moreover, life insurance has a unique tax advantage: death benefits are typically received tax-free by beneficiaries. Because of this big tax perk, the tax code disallows deducting the cost of obtaining that benefit. In simple terms, you cannot get a tax break on the money going in (premiums) when the money coming out (the payout) is not taxed.

Key Tax Code Basis: Several provisions of U.S. tax law cement this rule. Internal Revenue Code Section 262 broadly denies deductions for personal expenses. More specifically, IRC Section 264(a)(1) explicitly forbids deducting premiums on any life insurance policy if the taxpayer is directly or indirectly a beneficiary of the policy. In plain English, if you pay for a life insurance policy and you (or your family or your business) would collect the death benefit, you can’t deduct the premium. This applies even if the policy is somehow connected to your business. The tax code is effectively saying: “No double dipping – you don’t get to deduct premiums if you’ll get a tax-free payoff.”

Contrast with Other Insurance: It’s worth noting the contrast with other types of insurance:

• Health insurance: Often deductible (for example, employer-provided health premiums are deductible to the employer, and self-employed individuals can deduct their health insurance above the line) because medical expenses can be tax favored and health benefits (payouts) are not generally tax-free windfalls but payments for specific costs.

• Business insurance (property, liability, etc.): Deductible because they protect income-producing activities and their payouts are typically taxable or at least offset losses.

• Life insurance: Not deductible in personal contexts because of the tax-free personal benefit, as explained. It’s more like buying peace of mind for your family – the IRS treats it like buying a personal security blanket, not a business necessity.

Bottom Line: As a foundational rule, if you’re paying life insurance premiums on your own life or someone else’s life for personal reasons, you should not expect any tax deduction. Now, let’s delve into the specifics for different policy types and scenarios to see where exceptions might apply.

Types of Life Insurance Policies and Their Tax Implications

Life insurance isn’t one-size-fits-all. Different policy types have different features – but regardless of type, the premium is usually not tax-deductible for individuals. Let’s break down the main types (term, whole, universal, and group life insurance) and highlight their key tax aspects beyond just deductibility:

Term Life Insurance – Pure Protection, No Tax Write-Off

What it is: Term life insurance is the simplest form of life coverage. You pay a premium for a specific term (e.g. 10, 20, or 30 years). If you die during that term, the policy pays a death benefit to your beneficiaries. If you outlive the term, the coverage ends (or you renew at higher rates). There’s no cash value accumulating inside the policy – it’s pure insurance.

Tax implications: Term life is straightforward:

• Premiums: Not tax-deductible when you pay them for personal coverage. They’re a personal expense, just like paying for auto or homeowner’s insurance for personal use.

• Death benefit: Generally income tax-free to the beneficiary. For example, if you have a $500,000 term policy and you pass away, your family receives $500,000, and they do not report that as taxable income on their tax return.

• No cash value: Since term policies don’t build cash value or investment component, there are no tax-deferred savings or interest to worry about. You can’t borrow from a term policy, and you won’t owe taxes on anything unless a payout occurs.

• Typical uses: Family protection, covering financial obligations that last a term (like the years until children are grown or a 20-year mortgage). From a tax perspective, term is clean and simple – no deductions, but no taxable gain either.

Business note: If a company buys term insurance on an employee’s life, the same rule applies: if the company is the beneficiary (like key person insurance), premiums are not deductible. We’ll cover business scenarios in detail later, but keep in mind term insurance used by a business can fall into either non-deductible or deductible categories depending on who benefits from the policy.

Whole Life Insurance – Cash Value and Tax-Deferred Growth (But No Deductible Premium)

What it is: Whole life is a type of permanent life insurance. It covers you for your entire life (not just a term) as long as premiums are paid. Premiums are higher than term for the same death benefit, but part of the premium goes into a cash value account that grows over time. Whole life policies often pay dividends (for participating policies) which can increase the cash value or be taken in cash or used to offset premiums.

Tax implications:

• Premiums: Still not deductible for personal policies. Paying your whole life premium doesn’t reduce your taxable income. Think of it like putting money into a savings account that will benefit your family later – it’s voluntary and personal, so no deduction.

• Cash value growth: One tax advantage here is that the cash value inside the policy grows tax-deferred. You’re not taxed yearly on the interest or dividends as long as they stay within the policy. This is similar to how an IRA or 401(k) might grow tax-deferred – except with life insurance, it’s not meant primarily for retirement and you don’t get an upfront deduction on contributions.

• Accessing cash value: If you withdraw cash value or surrender (cancel) the policy for cash, part of that could be taxable. Specifically, any amount you receive above what you’ve paid in premiums (your “basis”) is taxable as ordinary income. Example: You paid $50,000 in premiums over many years, and now the cash surrender value is $70,000. If you surrender, the $20,000 gain would be taxable.

  • However, if you just borrow against the cash value (take a policy loan), you typically do not owe tax on loan proceeds (assuming the policy stays in force) because loans are not income; they’re debt. Caution: if the policy lapses or is surrendered with a loan outstanding, the borrowed amount can be considered distribution and can trigger tax at that point.

• Death benefit: Still generally tax-free to beneficiaries, even if the cash value grew substantially. Any gains that were never taxed become irrelevant at death – the beneficiaries get the full death benefit without income tax. (One exception: if the policy was turned into a Modified Endowment Contract (MEC) by funding it too fast, some tax rules change for distributions, but the death benefit remains tax-free. MECs are a complex topic beyond our scope here, but just know overfunding a policy can make loans/withdrawals taxable; it doesn’t affect premium deductibility though.)

Bottom line: Whole life offers tax-deferred growth and a tax-free payout, but you can’t deduct the premiums. The tax benefits come later (tax-deferred accumulation and tax-free transfer at death), not as an upfront write-off.

Universal Life Insurance – Flexible Premiums, Same Deduction Rule

What it is: Universal life (UL) is another form of permanent life insurance, but with more flexibility than whole life. You can adjust your premium payments (within limits) and death benefit. It also has a cash value component that earns interest (or in case of Indexed Universal Life, interest tied to market index performance; Variable Universal Life, invested in subaccounts). Essentially, UL allows policyholders to vary their payments and even potentially skip a premium if there’s enough cash value to cover insurance costs.

Tax implications: Tax-wise, universal life is very similar to whole life:

• Premiums: Not tax-deductible personally. Flexible or not, paying your UL premium out-of-pocket doesn’t get a tax break.

• Cash value growth: Also tax-deferred. Interest or gains inside the UL policy aren’t taxed as they accumulate. If it’s an indexed or variable UL, any credited interest or investment gains accumulate without immediate tax.

• Withdrawals/loans: You can withdraw cash (up to the amount of premiums paid in, generally tax-free as return of basis) or take policy loans tax-free (again, as long as the policy stays in force). Any withdrawals above basis, or any outstanding loan amount if the policy lapses, would be taxable. The same caution with Modified Endowment Contracts applies – overfunding can turn a UL into a MEC, making distributions taxable and possibly subject to penalties if under age 59½.

• Death benefit: Income tax-free to beneficiaries, just like other life insurance, assuming the policy meets the IRS definition of life insurance (which UL does if managed properly).

Unique considerations: Because UL allows skipping premiums if cash value is sufficient, some might wonder: Could I argue skipped premiums as some kind of loss or deduction? The answer is no – there’s simply no deduction involved in any aspect of a universal life policy from the payer’s perspective. The flexibility just affects how and when you fund the policy, not whether it’s deductible.

Summary: Universal life gives policyholders more control over funding and can build cash value with tax deferral, but just like whole life, no upfront deduction for what you pay in. All tax benefits are on the back end (internal growth and payout).

Group Life Insurance – Employer-Paid Coverage and Tax Perks

What it is: Group life insurance (often group term life) is coverage that an employer provides for its employees as a benefit. Typically, employers offer a base amount of life insurance (commonly, term insurance equal to 1x or 2x the employee’s salary, or a fixed amount like $50,000) at no cost to the employee, with options for the employee to purchase additional coverage. Group life policies usually cover many employees under one contract, and the employer pays some or all of the premiums.

Tax implications (for employees and employers):

• Premiums: If you’re the employee receiving group life coverage, you’re not paying the premium (the employer is), so you don’t deduct anything. For the employer, those premiums are generally tax-deductible business expenses (just like paying salaries or health benefits) as long as the employer is not the beneficiary. In group life, the beneficiaries are usually the employees’ chosen family members, so this condition is met. We’ll discuss employer deductions more in the business sections, but group life is a key exception to the “no deduction” rule – it’s deductible to the employer because it’s considered part of employee compensation costs.

• Employee taxation: Here’s a perk: the first $50,000 of group term life coverage per employee is tax-free to the employee. This is under IRC Section 79, which allows employees to exclude the value of employer-provided group term life insurance up to $50k. That means if your company provides $50,000 of life insurance, you don’t report any income for that benefit. If the employer provides more than $50k coverage, the “imputed cost” of the coverage over $50k is treated as taxable income to the employee.

  • In practice, the employer uses IRS tables to determine the value of the excess coverage (based on age, etc.) and includes that amount on the employee’s W-2 as taxable wages (often labeled as “Group Term Life Imputed Income”). It’s usually a modest amount, but it is taxed. For example, if you have $200,000 of coverage through your job, you’ll see a few extra dollars of taxable income on your W-2 for the value of $150,000 excess coverage, per IRS premium tables.

• Employer deduction: From the employer’s side, they can deduct the premiums paid for group life coverage as a business expense (it’s part of employee benefit programs). Even if the coverage exceeds $50k and causes some taxable benefit to the employee, the entire premium the employer paid is still a legitimate deductible expense for the company.

• Nondiscrimination rules: To get the full $50k tax-free benefit for employees, group life plans should not discriminate in favor of highly paid employees or owners. If the plan is biased (for example, only the owner and a couple of top managers get coverage), then the key people may not get the $50k exclusion – they might have to treat the whole value as taxable income.

  • This doesn’t usually affect whether the employer can deduct the premiums (the deduction is still fine if it’s reasonable compensation), but it affects the employees’ taxation. The takeaway: broad-based group plans benefit everyone tax-wise; discriminatory plans can sour the tax benefits for the favored few (though the company can still pay and deduct the cost as compensation).

Key point: Group life insurance is a common way businesses provide a tax-advantaged benefit. Employees get free or cheap coverage (with partial or full tax exclusion), and employers get a deduction for the cost. It’s a win-win, with the only minor drawback being taxation of coverage value over $50k (and even that can be avoided if an employee pays the extra cost themselves or if the coverage is kept at $50k).

Quick Policy Type Comparison Table

(Note: “Premium deductible” column reflects typical federal tax treatment. Personal-paid premiums are not deductible; employer-paid group premiums are deductible to the business. Death benefits are generally income-tax-free in all cases to the beneficiary, with rare exceptions not covered here.)

Now that we’ve covered the general tax characteristics of each type of life insurance, let’s explore how these rules play out for different taxpayers: individuals, small business owners, and corporations.

Life Insurance Premiums for Individuals: No Personal Deductions

If you’re an individual paying for your own life insurance (or a policy on your spouse, child, or anyone where you’re essentially paying out of personal funds for personal protection), the premiums are not tax-deductible. This is the case whether it’s term, whole, universal, or any other kind of policy on your life (or your family’s lives) that you own.

Federal Income Tax (Personal): Life insurance premiums don’t qualify as an itemized deduction on Schedule A of your Form 1040. They’re not medical expenses, not state taxes, not mortgage interest, not charity – they simply don’t fit any deductible category. The IRS explicitly lists life insurance premiums as non-deductible personal expenses (falling under the umbrella of IRC §262 as personal, living or family expenses).

Even if you itemize deductions, you won’t find a line for life insurance premiums. For example, you cannot deduct your $200/month term life insurance cost to protect your family – it’s akin to paying for your groceries or a family vacation in the eyes of tax law (personal benefit, no deduction).

Example: John pays $1,000 a year for a term life policy to protect his family. When filing his taxes, John cannot deduct that $1,000. It doesn’t matter if John feels life insurance is financially prudent or even necessary for his family’s security – the tax code still treats it as a personal expense. John’s friend, who pays a mortgage, can deduct mortgage interest; another friend with high medical bills can deduct those if they itemize (and exceed certain thresholds). But John’s life insurance premium is simply not tax-deductible on his 1040.

What about “dual purpose” scenarios? Some individuals might argue, “My life insurance is partly for business protection” or “My lender required a life insurance policy for a business loan – so isn’t that a business expense?” The IRS has thought of that: if you (or your business) are a direct or indirect beneficiary of the policy, the premiums are not deductible. So if you’re self-employed and your bank made you get a life policy as collateral for a business loan, you might feel it’s a business expense.

But because the insurance ultimately benefits either the lender (to pay off the loan) and then your business (freeing it from debt) or your family (if they get anything beyond the loan payoff), the IRS treats you/your business as benefiting. Result: no deduction. It’s a frustrating catch-22: the insurance is demanded for business reasons, but not deductible as a business expense. (However, one thing to note: if you did collateralize a loan with life insurance, while the premium isn’t deductible, any interest you pay on a business loan usually is deductible as a business expense. So the loan interest – yes, deductible business interest; the life insurance premium – no, it’s like a personal insurance cost.)

State Income Tax: States generally conform to federal rules on what’s deductible for personal income tax. If it’s not deductible federally, you won’t deduct it on the state return either. Most states use federal adjusted gross income or taxable income as a starting point, and they have their own list of allowed itemized deductions (often similar to the federal list). Nowhere on state forms will you find life insurance premiums as a deduction for individuals.

There have been historical exceptions: for instance, decades ago New York allowed residents a small deduction for life insurance premiums (up to a certain low dollar amount), and currently, a few states offer very targeted incentives (e.g. Georgia provides a tax credit for life insurance premiums for National Guard members under certain conditions). But these are niche cases. For the vast majority of individuals in most states, there’s no state tax deduction for life insurance premiums. If you’re unsure, check your state’s tax guidance, but don’t be surprised to see life insurance absent from the deductible list.

Are there any personal exceptions?
A couple of special situations where life insurance premiums might play into your tax return for individuals:

• Alimony agreements (pre-2019): This is an uncommon scenario, but worth mentioning. In divorce agreements prior to 2019 (when alimony was deductible to the payer and taxable to the recipient under old rules), sometimes a divorce decree required one ex-spouse to maintain a life insurance policy for the benefit of the other or the children. If structured correctly, the paying spouse could treat the life insurance premium as part of alimony payments.

  • Deductible alimony had to be in cash, though – paying a third party (the insurance company) could qualify if it was required by the divorce instrument for the benefit of the ex-spouse. However, since 2019 (post-Tax Cuts and Jobs Act), alimony is no longer deductible for new agreements, so this strategy mostly matters for older divorce agreements still in effect. And even then, it’s a nuanced tax law area: the policy ownership and beneficiary designations must align with alimony rules. This is a rare exception and not a broad “deduct your life insurance” rule.

• Charitable donations via life insurance: If you’re very charitably inclined, you might donate a life insurance policy to a charity (or name a charity as beneficiary and also transfer ownership to the charity). If the charity owns the policy and you keep paying the premiums as donations, those premium payments can be treated as charitable contributions on your Schedule A. For example, you donate a whole life policy to a nonprofit, and each year you donate $500 to the charity which they use to pay the premium. That $500 is a charitable donation (if you itemize deductions) rather than a personal insurance expense. The key is you no longer own the policy – the charity does.

  • This isn’t a “deduct my life insurance” for personal benefit; it’s converting it into a charitable gift. It’s a legitimate strategy for someone who may have a policy they no longer need for family protection and would rather support a cause. Note: your deduction is subject to the usual limits on charitable contributions (e.g., 60% of AGI for cash, etc.), and you’d need proper documentation from the charity.

• Life insurance in a business context but taxed personally: Sometimes small business owners pay premiums through the business but can’t deduct them (coming up in the next section). In such cases, the premiums may be treated as a draw, distribution, or fringe benefit.

  • For example, if an S corporation pays the owner’s life insurance premium, the amount is often added to the owner’s W-2 as taxable income (or treated as a nondeductible distribution). The owner still effectively pays tax on it personally. Even in these cases, the owner can’t turn around and deduct it on their personal return because it’s still life insurance for their benefit. It’s simply being taxed as if the company gave them cash which they then used to buy insurance.

Key takeaway for individuals: Don’t plan on any tax deduction for your life insurance premiums. Budget for premiums as part of your after-tax personal expenses. The real financial benefit of life insurance comes in the form of protection and peace of mind for your family (and the tax-free payout to them if something happens to you), not in yearly tax savings. If you see promotions or hear advice suggesting you can write off your life insurance, read the fine print – it usually involves very specific setups (like the charity ownership idea or business contexts), not typical personal policies.

Life Insurance Premiums for Small Business Owners: Navigating Deductibility

Small business owners often blur the lines between personal and business finances. It’s common to ask, “Can I run my life insurance premiums through my business and deduct them as a business expense?” The notion is tempting – after all, business expenses are deductible and reduce taxable business income. However, for most small business owners, the answer is: No, not if the insurance is primarily for your benefit or your family’s. Let’s unpack this by business type and scenario.

Sole Proprietors (Schedule C) and Single-Member LLCs: If you’re a sole proprietor, you report business income and expenses on Schedule C of your personal tax return. Life insurance premiums for a policy on your own life (or your family’s) should not be recorded as a business expense on Schedule C. They provide no deduction. The IRS would reclassify or disallow it if you tried. For instance, you might think, “I’ll put my life insurance under ‘insurance expense’ on Schedule C along with my liability insurance.”

Don’t do it – that category is meant for business-related insurance (like liability, property insurance, maybe health insurance for employees). Life insurance on the owner is explicitly not allowed. If it’s discovered, the IRS will simply add it back to your taxable income (and possibly penalize for an improper deduction). In effect, sole proprietors are treated just like individuals (because legally, you are the same as your business): no write-off for life insurance that benefits you personally.

Partnerships and LLCs taxed as Partnerships: Suppose you own a business with partners, and the partnership entity pays life insurance premiums on partners’ lives. The tax treatment:

• If the partnership is the beneficiary (for example, the partnership owns policies on each partner to fund a buy-sell agreement or protect the business), the premiums are not deductible at the partnership level. They will be recorded on the partnership books as an expense, but on the partnership tax return (Form 1065) they’ll be classified as a nondeductible expense (there’s a specific line for nondeductible expenses in the tax return schedules).

  • These premiums still reduce the partnership’s economic profit (so effectively they come out of the partners’ pockets), and each partner’s basis in the partnership is reduced by their share of the nondeductible expense. You don’t get a tax deduction benefit; instead, you get an adjusted basis. (As a silver lining, if the partnership later receives the death benefit, that is not taxable income but may increase the partners’ basis as tax-exempt income. But no deduction up front.)

• If the partners or their families are the beneficiaries (for example, sometimes a partnership might pay the premium on policies that the partners individually own as part of an agreement), then effectively the partnership is just paying on behalf of partners. In such a case, the premium should be treated as a distribution to the respective partner (or possibly a guaranteed payment if it’s intended as compensation). Either way, it’s not a deductible business expense – it’s treated as if the partnership gave the partner cash (deduction for distribution not allowed) and the partner paid the premium personally. The partner then cannot deduct it either, as we covered in individual cases.

S Corporations (and LLCs taxed as S Corps): S corporations often have owner-employees who might try to have the company pay various personal costs. The rule for life insurance is consistent:

• If the S-corp is the policy owner/beneficiary (like key person insurance on a shareholder or employee where the company gets the payout), no deduction for premiums. On the S-corp tax return, it’s a nondeductible expense. It still reduces book income and the shareholders’ stock basis, but it won’t reduce taxable income on the S-corp K-1 flow-through. So the shareholders don’t get a tax break; they effectively pay it out of after-tax dollars.

• If the S-corp pays a premium on a policy that the shareholder owns (or their family is beneficiary), it’s treated either as additional taxable compensation to that shareholder (if they’re an employee) or as a distribution. In many cases for >2% S-corp shareholder-employees, fringe benefits like life insurance must be added to their W-2 as wages. For example, say the S-corp pays $2,000 premium for the owner’s whole life policy which names the owner’s spouse as beneficiary.

  • The company can’t deduct $2,000 as an insurance expense. Instead, it will add $2,000 to the owner’s W-2 income (making it taxable to the owner as if they got a $2,000 cash bonus). The S-corp can then deduct that $2,000 as a wage/bonus expense (compensation is deductible), but the owner pays income tax on it, nullifying any advantage. If the S-corp doesn’t want to include it in W-2, it would just be a nondeductible distribution of profits. Either path, the owner ends up with no tax savings overall:

  • As compensation: company deducts, owner pays tax on more salary = no net gain, just moving the tax burden.

  • As distribution: company doesn’t deduct, owner doesn’t pay extra income tax but company profits remain higher for tax = effectively the same as no deduction.

C Corporations (small ones): If you have a regular corporation (C-corp), the logic is similar but the taxation is at the corporate level first:

• Company as beneficiary (key person insurance on an owner or key employee): Premium not deductible, as per Section 264. The company pays out of after-tax earnings. If a claim happens, the company gets tax-free money. There’s no flow-through of basis issues like S-corp, but effectively you’ve taken an expense with no immediate tax relief.

• Company pays for a policy that an employee/shareholder owns: If it’s a true compensation arrangement (like an executive bonus plan, details in the corporate section below), the corporation treats it as bonus payroll (deductible), and the employee/shareholder picks up taxable income. That scenario allows a deduction (we’ll cover it as a special strategy). If it’s not formally done as compensation, and it’s just the corporation paying a personal expense of a shareholder, the IRS can classify that as either compensation anyway or as a dividend distribution (which wouldn’t be deductible).

  • If a C-corp treats it as a dividend, the shareholder pays tax on the dividend and the corp can’t deduct it – a lose-lose on taxes. So most C-corps, if they’re going to pay an owner’s life insurance, would call it compensation to at least get the corporate deduction (though then the individual is taxed on it, so again, no free lunch).

Key Person Insurance (for small businesses): Often small businesses purchase key person life insurance on the owner or a critical employee. This is to protect the business financially if that person dies (covering lost revenue, hiring costs, paying off debts, etc.). Important: Key person premiums are not deductible because the business is usually the beneficiary. The IRS doesn’t allow a deduction for something that results in a tax-free benefit to the company.

So even though it’s “for the business,” it fails the deduction test due to the beneficiary issue. When budgeting for key person coverage, treat premiums as coming out of your after-tax business profit. On financial statements, you might show it as an expense for management purposes, but add it back for tax calculations as nondeductible. (Some companies even classify it separately to make clear it’s not to be included in tax-deductible expenses.)

Buy-Sell Agreement Funding: Many small businesses with multiple owners have buy-sell agreements that are funded by life insurance. For example, Partner A and Partner B each own policies on each other; if A dies, B gets insurance proceeds to buy A’s shares from A’s family, and vice versa. Alternatively, the company (if a corporation) might own a policy on each owner (entity purchase approach). In all cases, those premiums are not deductible.

The reasoning is the same: the payout (whether going to a partner or the company) is tax-free and it’s capital for buying shares, not a business expense. The IRS specifically disallows deductions for premiums on any policy where the taxpayer (the business or its owners) have a financial interest in the policy. A buy-sell policy is exactly that – it’s for the financial interest of the owners to ensure a smooth ownership transition. So you can’t deduct those premiums as a business expense, even though the purpose is business continuity. Plan for that cost accordingly.

So, can a small business owner ever deduct life insurance? Yes, but only by treating it as a compensation expense or employee benefit where someone else is the beneficiary:

• If you have employees (other than yourself/owners) and you provide group life insurance as a benefit, those premiums are deductible (again, because the employees’ families are beneficiaries, not the company).

• If you want to provide yourself (the owner) a benefit and still get a deduction, you must run it through as taxable compensation. This typically means using an Executive Bonus Plan (Section 162 Plan) structure:

  • The business either pays the premium directly to the insurance company on a policy owned by the employee/owner, or gives a bonus to the employee equal to the premium (and the employee then pays it). Either way, that bonus is taxable wages to the employee.

  • The business deducts the bonus as a compensation expense under IRC §162 (hence the name “162 plan”).

  • The employee/owner uses the bonus to pay for a personally owned life insurance policy (and they name their family or whoever as beneficiary).

  • End result: The employee/owner got a life insurance policy effectively funded with company money, the company got a deduction for the bonus paid, and the employee/owner had to pay income tax on that bonus (so the IRS gets its due there).

  • Often, companies will “gross up” the bonus to cover the tax for the employee, making it a “double bonus.” For example, if the premium is $10,000 and the owner is in a 35% tax bracket, the company might pay $15,384 as a bonus so that after roughly 35% tax (~$5,384) the owner net $10,000 to pay the premium. The company deducts $15,384; the owner gets a policy funded and pays no out-of-pocket, but does pay tax on the bonus.

  • Why do this? It’s a way for small business owners or key employees to get life insurance using pre-tax corporate dollars, albeit with the trade-off of reporting taxable income. It can still be advantageous especially for C-corp owners trying to extract money in a deductible way, or for an S-corp owner who wants the corporation to fund the policy (the S-corp deduction is passed through to reduce their taxable income, while they report the bonus – it can be a wash, but at least it’s above-board).

  • Important: In a Section 162 bonus plan, the company is not the policy beneficiary. The employee/owner is the policy owner, and they designate their beneficiary (often a family member or trust). This ensures the company is not directly benefiting from the death benefit, which is why the IRS allows the deduction (it’s just pay to the employee). If the company retained any rights or beneficiary status, deduction would be off the table.

  • These plans are relatively simple to implement (just need a board resolution or agreement specifying the bonus arrangement and maybe a vesting schedule to incentivize the employee to stay). For a small business owner, you don’t even need a formal plan – you just decide to take a bonus and buy insurance. But documenting it helps show the intent if ever questioned.

Example (Small Business Owner Deduction via Bonus): Lisa owns an S-corp with a few employees. She wants a $1 million permanent life insurance policy on herself for estate planning. If the company simply pays the premium, it’s nondeductible or has to be added to her W-2. Instead, she sets up an executive bonus plan. Her company pays her an annual bonus of $12,000, and she pays that towards her life insurance premium. The company classifies $12,000 as executive bonus compensation (deductible).

Lisa’s W-2 income goes up by $12,000; she pays income tax on that, but effectively the policy is funded with company money. The company isn’t the beneficiary, Lisa’s family is. Everyone involved (IRS included) is satisfied: the company got its deduction, Lisa got her insurance (with some tax cost), and the IRS got tax on Lisa’s bonus.

Pitfall – C-Corp Owners: If a C-corp pays for a life insurance policy on an owner and calls it a business expense without including it in the owner’s W-2, it’s an improper deduction. In a C-corp, that would likely be reclassified as a constructive dividend to the owner (since they got personal benefit).

A constructive dividend is not deductible to the corporation and is taxable income (dividend) to the shareholder. That’s a worst-case scenario because corporate dividends aren’t a tax-efficient way to distribute (double taxed: corp profits taxed first, then dividend taxed to shareholder). So C-corp owners should either have the corporation own the policy for a legitimate business reason (no deduction, but at least potential tax-free benefit to corp) or run it as a bonus plan (deductible but owner taxed). Never just bury it as an expense – it won’t hold up.

State Taxes for Small Biz: As with individuals, state income tax generally follows the federal treatment. If your business couldn’t deduct it federally, you typically can’t deduct it on your state business return either. If you managed a deduction via an executive bonus (i.e., increased wages), that wage expense is deductible in states too, since it’s part of ordinary business expenses.

Partnerships and S-corps that pass through income: the nondeductible premium expenses reduce income on the K-1 at the federal level and do the same for state (because state starts with the federal income in most cases). There’s usually no separate state add-backs or deductions specifically for life insurance premiums in pass-through entities.

In summary for small businesses:

• Don’t count on deducting life insurance premiums if the business (or its owners) is the beneficiary. It will be a nondeductible expense.

• If you want a deduction, change who benefits: make it an employee benefit or a bonus to someone (possibly yourself, but then you bear the tax as individual income).

• Keep good records of any such arrangement to satisfy tax authorities that you followed the rules (e.g., board resolutions for bonuses, include in W-2s, etc.).

• Understand that any tax advantage comes with a trade-off: you either lose the deduction to get tax-free proceeds, or you get a deduction but someone pays taxes on that money now.

Next, we’ll look at larger businesses and corporations, where the principles remain similar but often involve more employees and some specialized regulations.

Life Insurance Premiums for Corporations and Employers: Benefits vs. Company-Owned Policies

When we move into the realm of corporations (particularly C corporations and companies with multiple employees), life insurance can serve different purposes: an employee benefit, key person protection, part of a deferred compensation plan, etc. The tax treatment will hinge on who the policy is meant to benefit. Let’s explore corporate scenarios:

Group Life Insurance as an Employee Benefit (Deductible)

As discussed earlier, when a corporation provides group term life insurance coverage to its employees, it’s considered a fringe benefit and a form of compensation. The corporation can deduct the premiums it pays for this coverage as a business expense (just like it would deduct salaries, employer-paid health premiums, retirement plan contributions, etc.).

Why it’s allowed: The corporation is not the beneficiary of a group life policy – the employees (or their families) are. The company is effectively spending money on behalf of employees as part of their compensation package. This falls under the umbrella of “ordinary and necessary business expenses” (IRC §162) because providing benefits helps attract and retain workers.

Example: BigCo has 100 employees and provides each employee with company-paid term life insurance equal to their annual salary. The total premium cost for the year is $20,000 for all policies. BigCo pays this to the insurance carrier, and it will record $20,000 as insurance expense (or employee benefits expense) on its books. On BigCo’s corporate tax return, that $20,000 is fully deductible. None of that is disallowed by Section 264 because BigCo is not a beneficiary of those policies.

Employee side: Each employee with coverage up to $50k has no tax impact. If some coverage exceeds $50k, the company will calculate the taxable benefit (imputed income) for those employees for the portion above $50k and report it on their W-2. For example, an executive with $200k coverage might have something like $200 of taxable imputed income for the year. The company does this calculation using IRS tables (based on age). This doesn’t affect the company’s deduction – the company still deducted the full premium it paid. The inclusion of income just ensures the employee pays a bit of tax on the excess benefit.

Key Employee/Owner considerations: If the company’s group life plan discriminates (e.g., only covers executives or provides higher multiples to execs), then as mentioned, those key individuals may not get to exclude the first $50k; they might have to include the value of the entire coverage in income. But from a deduction standpoint, the company still writes off the cost.

Also, in certain cases with small companies, the IRS might question whether a supposed “group” plan is really just a personal policy for the owner. Genuine group policies usually require a pool of employees and are offered by insurance companies under specific group underwriting rules. If an owner tries to call their individual policy a “group” policy of the company and they have no other employees, that won’t fly. A one-person “group” isn’t a group – that’s just an individual policy. So single-owner corporations generally cannot magically deduct their life insurance by labeling it group term unless they actually set up an employee benefit plan and ideally have at least one common-law employee to justify it.

Key Person (Key Man) Life Insurance (Not Deductible)

Corporations often insure the lives of key executives, founders, or indispensable employees. The policy is owned by the company, and the company is the beneficiary. The purpose is to provide the company with funds if that person dies, to cover things like hiring a replacement, offset lost sales, reassure creditors, or pay off debts.

Tax treatment: Premiums for key person life insurance are not deductible. This rule is unwavering for C corps, S corps, partnerships, etc. If the company is benefiting from the policy (receiving the payout), no deduction for the cost. As cited before, IRC §264(a)(1) is directly on point. The company must pay these premiums out of pocket without a tax break. On financial statements, key person premiums might be recorded as an expense for accounting, but then an add-back for tax or recorded as an “off-book” expense not deductible for tax.

Death benefit: If the unfortunate event occurs and the key person dies, the company receives the insurance proceeds income-tax-free (assuming they followed a few formalities – more on that in a moment). The company can use that money for its needs. There’s no tax on the benefit, which is precisely why they didn’t get a deduction for the premiums.

Formalities – Section 101(j): There’s a relatively recent addition to tax law (enacted in 2006) regarding employer-owned life insurance. Under Section 101(j), if a company owns a policy on an employee, the death benefit will remain tax-free only if certain notice and consent requirements were met before the policy was issued. The employee must be notified in writing and consent to being insured, and the employer must meet certain criteria (the insured was an employee within 12 months of death or a highly compensated individual, etc.). Additionally, the employer has to report these policies to the IRS (Form 8925 each year, listing number of employees insured, total amount, etc.). If these rules are not followed, the death benefit in excess of premiums paid can become taxable to the company!

This doesn’t directly relate to deducting premiums (premiums are still not deductible regardless), but it’s a critical trap for corporations: they must handle documentation for key person policies properly to preserve the tax-free nature of the death benefit. Lesson: If your corporation buys key person insurance, ensure you get the employee’s consent and file the necessary forms so you don’t accidentally convert that death benefit into taxable income.

Financial impact: Since key person premiums aren’t deductible, they effectively come out of after-tax profits. For a C corporation, that means paying with dollars that have been taxed at the corporate rate. For example, if a C-corp is in the 21% federal tax bracket and pays $10,000 in key man premiums, that $10,000 cost them $10,000 (no reduction in taxable income).

If it had been a deductible expense, it would have saved them $2,100 in taxes. So there’s a real cost to the disallowance. With S-corps or partnerships, the cost just flows to owners – e.g., an S-corp with $100,000 profit and $10,000 key man premium will still show $100,000 taxable profit on the K-1 (but shareholder gets basis credit for the $10k nondeductible expense). Owners might feel it in their wallet indirectly (they could have distributed that $10k or had less pass-through income taxed to them if it were deductible, but they can’t).

What about policies required by lenders or investors? Often a bank or investor in a small corporation will require the company to have insurance on a founder or key person (with the company or even the bank as beneficiary to cover a loan). The IRS still views the corporation as benefiting (keeping the business afloat or repaying a loan benefits the business), so the premiums remain nondeductible. If the bank is directly named beneficiary to the extent of the loan, one might argue the business isn’t the beneficiary for that portion – but the business is still indirectly benefiting by the loan being paid. There’s no special carve-out that says “if your lender made you do it, you can deduct it.” So corporations in that situation should treat it like any key person policy – no deduction.

Executive Bonus Plans (Section 162 Plans) – A Corporate Loophole to Deduct Premiums

As discussed in the small business section, corporations (including C-corps) can utilize Executive Bonus Plans to effectively make life insurance premiums deductible. This is a fringe benefit/compensation strategy:

• The company gives a bonus to a key employee (could be a non-owner executive or could be an owner-employee in a C-corp) specifically to pay a life insurance premium.

• The bonus is deductible to the company (it’s just additional compensation).

• The employee is the owner and insured of the policy, and chooses their own beneficiary (like their spouse or kids). The company has no ownership or benefit from the policy – its role ends at paying the bonus.

• The employee reports the bonus as income and uses the money to pay the premium.

This arrangement can be particularly attractive for C-corps. Why? In a C-corp, if the corporation simply paid a premium on the owner’s behalf without this arrangement, it’d either be nondeductible or a taxable dividend as mentioned. But by framing it as a bonus, the corp gets a deduction and the owner takes it as income (which may be more tax-efficient than a dividend, since dividends aren’t deductible and come out of after-tax profits).

For S-corps or LLCs, the benefit is a bit less clear-cut because any deduction just lowers pass-through income that goes right back to the owner’s tax return. In an S-corp, it’s almost a wash: give owner $10k more W-2 income (taxable to them), but S-corp income is $10k less (saving taxes at the owner’s rate on the K-1). The net effect on the owner’s personal taxes can be zero or minimal difference (except payroll tax considerations). However, some S-corps do it to formally document it and perhaps to allow the owner to participate in a “plan” similarly to other employees if given.

Employers might also add restrictions in an executive bonus plan, like requiring the employee to keep the policy in force or assigning the policy to the company as collateral (a “restrictive endorsement”) until a certain time to ensure the employee doesn’t just take the money and run. Even with such restrictions, the premium is deductible because it’s still treated as comp to the employee; the restriction just ensures the benefit serves its retention purpose.

Example: A corporation has a valuable sales manager it wants to reward and retain. The company sets up a Section 162 bonus plan: it will pay a bonus equal to the premium on a $500,000 whole life policy for that manager each year. Premium is $5,000/yr. The company pays $5,000, deducts $5,000. The manager has $5,000 extra in taxable wages (maybe $3,500 after tax if in 30% combined bracket).

The manager ends up with a fully paid life policy (and accumulating cash value) at a net personal cost of the tax on the bonus. If the company is generous, they might gross-up and pay maybe $7,000 so that after tax the manager nets $5,000 for the premium. Either way, the manager gets insured and a cash-value asset; the company uses pre-tax dollars to provide a benefit and keep the employee happy. Importantly, the corporation is not the beneficiary of this policy – it’s purely for the employee’s benefit.

From a tax perspective:

• Corporation’s taxable income is lower by $5,000 (saving it perhaps $1,050 in tax if 21% rate).

• Manager’s taxable income is higher by $5,000 (costing them taxes, but they got insurance out of it).

• The IRS sees compensation paid and taxed, so they don’t mind that indirectly insurance was funded.

Summary on executive bonus: It’s a legitimate way for corporations to leverage deductions to fund life insurance for someone, but it shifts the tax burden to that person as income. No free ride, but often worthwhile for benefits and planning.

Split-Dollar Life Insurance – Complex Fringe Arrangement (Deduction Depends)

Split-dollar life insurance is a more complex strategy where the employer and employee (or corporation and shareholder) split the costs and benefits of a life insurance policy. It’s not really about getting deductions; it’s more about providing life insurance in a tax-advantaged way or recovering premium costs. In classic split-dollar:

• The employer might pay the premium, but it has an agreement to be repaid either from the cash value or death benefit later.

• The employee gets the insurance protection (and maybe some cash value access).

For tax purposes, modern split-dollar plans fall under either the loan regime or economic benefit regime:

• If treated as a loan (loan regime), the premium the employer pays is considered a loan to the employee, and the employee has to pay interest (or have imputed interest income) on that loan. The employer expects to get the money back later. No premium deduction for the employer because it’s not an expense, it’s a loan asset on the books. The employee doesn’t report income (except interest imputation).

• If treated as economic benefit (endorsement method), the employer owns the policy and the employee is allowed to name a beneficiary for the death benefit portion minus what goes back to the employer. The “economic benefit” (term insurance value of the coverage the employee gets) is taxable to the employee each year (like imputed income), and the employer pays premium but will get back its contributions later (so again no deduction, since it’s expected back, similar to an investment).

Either way, split-dollar does not allow a current deduction for the premium to the company because the arrangement is usually designed so the company’s outlay is an asset (recoverable) rather than a true expense. The whole point of split-dollar is not a tax deduction but rather to give an employee insurance at low current cost (just some imputed income or interest) while the company eventually recovers its money.

Given the complexity, most small companies don’t use split-dollar unless it’s a high-end executive perk or closely-held business owners with estate planning goals (and tax law changes have made it less popular than in past decades).

Thus, while we mention split-dollar for completeness, it’s not a method to deduct premiums; it’s a method to share premiums. In the context of our core question, split-dollar arrangements don’t create deductible life insurance premiums, and if done incorrectly, can create a mess of taxable transactions. They also have special IRS rules and potential gift tax or alternative tax issues if a shareholder is involved.

Corporate-Owned Life Insurance (COLI) and Bank-Owned (BOLI) – Special Mention

Large corporations and banks sometimes have broad life insurance programs insuring many employees (often naming themselves as beneficiary). These are known as COLI or BOLI policies, used as informal funding mechanisms for benefits or as investments due to tax-free buildup and payouts. For example, a bank might insure a bunch of employees and use the eventual death benefits to fund retirement benefits or just as a tax-free income source in the future.

Tax on premiums: Same fundamental rule – premiums are not deductible. In fact, some abusive COLI practices in the past (where companies insured thousands of low-level employees simply to be beneficiaries and get tax-free death payouts, aka “janitor insurance”) were curtailed by legislation and Section 101(j) as mentioned. Now companies must have a legitimate business reason and consent from insureds. But they still cannot deduct the premiums. They’re investing after-tax dollars into these policies.

Tax on inside buildup: The cash value growth in COLI/BOLI is tax-deferred (like any life insurance). This is one main appeal for companies: they park money in life policies, it grows without current tax, and if structured right, they get it out as death benefits tax-free or via loans.

Financial accounting: Premiums paid for COLI might be recorded as investments or cash surrender value assets, not expenses, since they expect to recover it. The company might only expense the pure insurance cost portion.

We mention COLI/BOLI just to reinforce that even at big corporate levels, no special deduction exists for paying life insurance on employees for the corporation’s own benefit. They accept the nondeductible cost in exchange for future tax-favored gains.

Summary of Corporate Scenarios in a Table

To crystallize what a corporation can and cannot deduct, here’s a quick reference:

The last point in the table is a nuanced one: qualified plans (like defined benefit pensions) can hold some life insurance (usually limited to a percentage of the plan contributions). In those cases, the employer’s contributions to the plan are deductible (as retirement plan contributions), and some of that money buys life insurance inside the plan. The death benefit (minus cash value) can even be paid tax-free to the plan beneficiary.

This is an advanced strategy sometimes used in closely-held companies’ pension plans. However, individuals then are taxed on “PS 58” costs (the term cost of life insurance inside the plan as taxable benefit), and if the policy is distributed it can have tax consequences. It’s too deep to fully cover here, but it’s another example of how the tax code is usually consistent: even when allowed, the pure insurance element tends to be taxed one way or another (PS 58 cost is like imputed income to the insured plan participant) if someone is getting a benefit, and the deduction is tied to something else (retirement contribution, not directly the premium). This is not mainstream and certainly not something most people or even many businesses do, but it exists.

State Tax for Corporations: Again, states mostly piggyback off federal definitions of taxable income for corporations. If a premium is deductible for federal (like group life expense), it’s deductible for state. If it’s not for federal (like key person), it’s not for state either. States generally don’t have special adjustments for life insurance expenses. One possible state-level difference: the taxation of the employee benefit portion might differ slightly if a state doesn’t tax certain fringe benefits or has different thresholds, but typically they follow the federal $50k rule for excluding group term life and include any imputed income in state wages as well.

Also, some states levy premium taxes on insurance companies for policies (around 1-2% of premium), but that doesn’t affect the corporation’s income tax deduction – it’s just part of the cost of the premium that the company is paying (and presumably factoring into the premium price).

Recap of Deductibility: To put it succinctly for corporations:

• Deductible: Premiums that are a form of employee compensation (group life, bonus plans) where the benefit is for the employee/third party.

• Not Deductible: Premiums where the corporation is keeping the benefit (insurance on themselves or to fund their obligations).

• Alternate tax benefits: Even when not deductible, life insurance can offer tax advantages (tax-free payouts, cash value growth) which is why companies might still utilize them without deductions.

Now that we’ve covered the gamut of scenarios from personal to corporate, let’s address some common mistakes and pitfalls people encounter with life insurance and taxes.

What Not to Do: Pitfalls to Avoid in Life Insurance Tax Treatment

Understanding the rules is one thing; avoiding mistakes in practice is another. Here are some common pitfalls and what to avoid when it comes to life insurance premiums and taxes:

• Don’t try to deduct personal life premiums like business expenses: A frequent mistake small business owners make is sneaking personal life insurance premiums into their business financials, thinking they’ll get a tax break. For example, charging your personal policy to your LLC’s account and expensing it.

  • Avoid this – it’s not allowed, and if audited, the IRS will throw it out (and possibly penalize for an improper deduction). Only life insurance that truly qualifies as a business expense (such as group policies for employees or bonus plans) should be on your business tax return. Personal policy = personal expense, always, even if you pay it from a business bank account.

• Avoid naming your business as beneficiary if you want a deduction: Sometimes business owners think they can both deduct a premium and have the business collect the benefit – a double win. The tax code explicitly closes that door. If your company is even indirectly a beneficiary, you forfeit the deduction. So, if you desire deductibility via a bonus plan or fringe benefit, make sure the policy’s beneficiaries are individuals (the employee or their family) and not the company.

  • Conversely, if it’s important for the company to be beneficiary (like key person insurance or funding a buyout), understand you’ll get no deduction. Trying to structure it otherwise (e.g., naming a spouse as beneficiary but intending the money to support the business) doesn’t fool the IRS if the intent and benefit is still for the business. Be clear up front: either it’s a company-benefit policy (no deduction) or an employee-benefit policy (potential deduction, but then the employee bears tax).

• Don’t assume all insurance premiums are treated the same: It’s easy to confuse life insurance with other insurances. For instance, health insurance premiums have various tax breaks, disability insurance premiums have their own rules (premiums non-deductible personally, but if employer-paid, then benefits become taxable to employee). Long-term care insurance even has limited deductions.

  • But life insurance stands apart in its near blanket disallowance of deductions. So avoid the logic of “I deducted my health insurance, so I’ll deduct my life insurance too” – that’s comparing apples and oranges in tax terms.

• Avoid disguising life insurance within other deductions: Some schemes have existed where promoters wrap life insurance funding into something like a qualified plan or a so-called “welfare benefit plan” to get a deduction. The IRS has largely shut these down or labeled them listed tax avoidance transactions. For example, stuffing lots of life insurance into a 419(e) welfare benefit trust and claiming large deductions – many such arrangements were deemed abusive. If someone suggests you can indirectly deduct life insurance by funneling money through a trust or plan, be very cautious and get independent tax advice. The IRS is aware of these tactics and often challenges them. Remember Neonatology case (if you’re a tax nerd) – a famous Tax Court case where doctors tried to deduct insurance premiums through a trust; the court disallowed it, essentially reaffirming “you can’t deduct personal life insurance by calling it something else.”

• Don’t ignore the tax implications to employees/owners: If you’re an employer providing life insurance benefits, avoid the mistake of forgetting to include taxable portions in wages. For instance, if you give your VP a $200k company-paid life policy and don’t report the value of coverage over $50k as income, you’re messing up payroll tax compliance. Similarly, if you do an executive bonus and fail to report that bonus on the W-2, you’ve taken a deduction without the corresponding income pick-up – the IRS will not be happy. Always handle the paperwork: report imputed income for group coverage > $50k, file Form 8925 for company-owned policies, include any bonuses as wages, and so on.

• Avoid estate tax traps (advanced planning note): While not about deducting premiums, here’s a related pitfall for business owners: If your company is the beneficiary of a life policy on you (like key man insurance) and you’re a significant owner of the company, the death benefit could be pulled into your estate value when you die (since the company value may increase or your shares’ value reflects that asset). This can potentially raise estate tax concerns.

  • The way around that is often to have a buy-sell where other owners are beneficiaries or an irrevocable life insurance trust if personal. Just a note: don’t assume life insurance’s tax-free nature means it’s completely outside of taxes — estate tax is a different animal. Coordinating ownership and beneficiaries can avoid unintended estate inclusion. If avoiding estate tax is a goal, don’t have incidents of ownership in a policy; use trusts or have the beneficiary be someone else from the start.

• Don’t base business decisions purely on deductibility: It might be tempting to say “If it’s not deductible, I won’t buy key person insurance for my business.” That could be a mistake from a risk management perspective. The tax tail shouldn’t wag the dog. The primary reason to have life insurance (personal or business) is for the protection and financial benefits, not for a tax break. The tax treatment is just one factor. Many a business has failed or been sold in distress when a key person died without insurance. So avoid letting tax nondeductibility discourage you from needed coverage. Instead, factor the after-tax cost into your planning.

• Avoid assuming future tax law changes will bail you out: Could Congress one day allow life insurance deductions? It’s highly unlikely without also taxing the death benefit. The current balance has been in place for a long time. Don’t gamble on “maybe next year this will become deductible” and take aggressive positions now. If any changes come, they’ll likely be prospective and part of bigger reforms (and frankly, life insurance lobby is strong; they like the tax-free death benefit status, which pairs with no deduction). Plan with today’s rules in mind.

By steering clear of these missteps, you can ensure that you’re in compliance and making sound decisions regarding life insurance and taxes. When in doubt, consult a tax professional who understands both tax law and insurance – it’s a niche intersection, and expert guidance can prevent costly mistakes.

FAQ: Life Insurance Premiums and Tax Deductions (Quick Answers)

Below are some frequently asked questions on this topic, answered in a concise yes-or-no format for quick reference:

Q: Are personal life insurance premiums tax-deductible in the US?
A: No. Premiums for personal life insurance policies (term, whole, etc.) are considered personal expenses and cannot be deducted on your federal income tax return.

Q: Can a business write off life insurance premiums as a business expense?
A: Yes, but only in specific cases. A business can deduct premiums if it’s providing the insurance as an employee benefit (and the business isn’t the beneficiary). If the business will get the payout, the premium is not deductible.

Q: Is key man life insurance deductible for a company?
A: No. When a company buys life insurance on a key employee or owner and the company is the beneficiary, the premiums are not tax-deductible. The company pays with after-tax dollars.

Q: Can an S corporation deduct life insurance premiums for its owners?
A: No. An S corp cannot deduct premiums for a policy that benefits an owner (or their family). If the S corp pays an owner’s premiums, it must treat it as taxable compensation or a distribution, not a deductible expense.

Q: Are group life insurance premiums deductible for employers?
A: Yes. Premiums an employer pays for group term life coverage on employees are generally deductible as a business expense. Employees get up to $50,000 of coverage tax-free, with taxable income only for coverage beyond that.

Q: Do employees pay tax on employer-provided life insurance coverage?
A: Mostly no. Employees don’t pay tax on the first $50,000 of employer-paid group term life coverage. Yes, they pay tax (imputed income) on the value of coverage exceeding $50,000, as determined by IRS tables.

Q: Are life insurance premiums ever deductible on state income taxes?
A: No, not in general. States typically follow federal rules, so you can’t deduct personal life insurance premiums on state returns either. Only rare programs (e.g., specific credits for certain groups) would allow any state benefit.

Q: Can life insurance premiums be a charitable tax deduction?
A: Yes, in a specific scenario. If you donate a life insurance policy to a charity (making the charity the owner and beneficiary) and you continue to pay the premiums as donations, those payments count as charitable contributions on your taxes.

Q: Is the death benefit from a life insurance policy taxable income?
A: No. The death benefit paid out from a life insurance policy is generally not taxable income to the beneficiary. It’s one reason why premiums aren’t deductible – because the payout isn’t taxed.

Q: Can I pay my life insurance premiums through my business to get a tax advantage?
A: Yes, but only with proper structure. Simply paying through the business won’t help unless it’s set up as a legitimate plan (like an executive bonus where it’s treated as compensation). Otherwise, no, it’s just treated as a personal expense or distribution.