Is Life Insurance Tax Deductible

Is Life Insurance Tax Deductible?

Unlike other insurances, such as car insurance or medical insurance, a life insurance policy does not cover you or anything you own. 

Instead, it covers your beneficiaries. Most of the time, beneficiaries are family members or loved ones. However, you can choose anyone you want to be your beneficiary. This includes friends and even charities or businesses.

If you have a life insurance policy and you pass away, your beneficiary can claim a death benefit from your policy. A death benefit is the amount of money your beneficiaries can collect from your policy after your passing.

Life Insurance and Taxes

There’s a lot of confusion when it comes to life insurance and taxes. Here we’re going to answer the common question “is life insurance tax deductible?” You’ll find the answer, and related information, below. 

What Is a Tax Deduction? 

First, let’s look at what exactly is a tax deduction. A tax deduction is the amount of money that is used to lower the amount of your taxable income. Usually the tax deductions for an individual are divided into five categories which are:

  • Work-related
  • Itemized
  • Education
  • Health care
  • Investment-related

Let’s say you have an income of $150,000. If you have deductions of $50,000, you would only pay taxes on $100,000 of income ($100,000 of income minus the $50,000 of deductions).

Is Life Insurance Tax Deductible?

So there are two aspects to look at here. One is related to the death benefit of the policy. The other relates to the premiums you pay for your life insurance policy. Let’s start there.

To keep your life insurance policy active, you pay premiums monthly or yearly. Typically, these premiums are NOT tax deductible.

The reason for this is because there is no state or federal mandate for a life insurance policy. Meaning, this is something that you choose to pay for personally. A life insurance policy is considered a personal expense if you choose to get one. 

When Life Insurance May Be Tax Deductible

However, there are some cases in which a life insurance policy can be tax-deductible. But cases such as this are rare. A life insurance policy can be tax-deductible if a person or company is paying for another person’s policy. 

Most commonly this is when a company offers life insurance as an employee benefit. If you are the business owner, then you (the company) are paying for your employees’ life insurance policies. In this situation, you can claim tax deductions on the premiums that you pay for your employees’ life insurance policies. 

However, if you are self-employed or your spouse is employed in your company, then you are generally not eligible for tax deductions. 

Cash Value

If you have a whole or universal life insurance policy, you probably have a cash value investment part of your policy. This investment is tax deferred. This means that no taxes are paid on them until they are withdrawn.

Death Benefit

But what about the death benefit? Is this tax deductible for your beneficiaries? Well, no, it’s not deductible. It’s better. It’s tax free! Your beneficiaries will not owe any taxes on the death benefit they receive from your policy. 

The only exception is any interest that is earned on the cash value part of a policy. For example, let’s say the cash value for a policy is $50,000. Of that $50,000, $40,000 was from premiums and the remaining $10,000 was from investment/interest income. That $10,000 would be subject to taxes.