Is life insurance tax-deductible?

The premiums you pay for life insurance are generally not tax deductible, but there are some exceptions. This article covers the exceptions and outlines several other tax advantages of life insurance.



Woman calculating her taxes at home

Are life insurance premiums tax deductible?

Finding a way to save on taxes is always a plus, especially when it helps offset recurring payments like life insurance premiums. While premiums are typically considered personal expenses that can’t be deducted, there are exceptions, and you should always consult a tax professional to see if you can take advantage of them. Some of the situations when life insurance premiums can be deducted include:

 

Alimony or child support settlements ordered before 2019:

If life insurance was court-ordered before 2019 to protect alimony or child support payments, you may be able to deduct those premiums from your taxable income.

 

Premiums paid for employees:

Small-business owners may be able to deduct the premiums for the group life insurance provided to their employees and for other small-business insurance policies like key-man insurance which protects the business from the loss of an indispensable employee. However, restrictions often apply.

 

Policies donated to charity:

Policy owners can usually deduct their life insurance premiums if they donate their policies to charitable organizations. The immediate deductible value is equal to the policy’s cash value, and any future premiums paid are also tax deductible after the gift is made.  

 

Tax advantages of life insurance

While the premiums you pay usually aren’t tax deductible, that doesn’t mean life insurance is without tax advantages. In fact, there are many ways life insurance can provide tax-free or tax-deferred benefits. Here are three of the primary tax benefits available through life insurance:

 

The death benefit is income-tax free

Although term life and whole life insurance premiums cannot be deducted in most cases, it’s worth noting that the death benefit is generally not subject to federal income taxes. When you pass away, your beneficiaries will not need to pay federal income taxes on the payout they receive from your policy.  

 

Cash value growth is tax deferred

With cash value life insurance, a portion of the premiums accumulates in an account that you can access during your lifetime. Depending on the type of policy you have, the cash value either grows at a rate guaranteed by the insurance company or according to the way it’s invested. Provided that the policy is structured to avoid over-funding, this growth is tax deferred, and you don’t have to pay taxes on the interest while it remains in the account1.

 

Tax-advantaged withdrawals from cash value

In addition to tax-deferred growth, cash value life insurance also allows tax-advantaged access to cash. Each policy will have its own requirements, but in most cases, you can make tax-free withdrawals from the cash value if your withdrawals aren’t greater than the value of the premiums you’ve paid. Tax-free access can be helpful if you want to supplement retirement income, cover emergency expenses, or pay off debts. However, accessing the cash value will reduce the available cash surrender value and the death benefit. When considering the benefits of an insurance policy, it’s best to seek the advice of a professional financial advisor.

 

Life insurance premiums and taxes FAQs

Life insurance premiums, whether term or whole life, are generally not tax deductible. However, there are some limited exceptions. You can claim life insurance premiums on your taxes if:

  • The life insurance was court-ordered before 2019 to safeguard alimony or child support.
  • The insurance premiums are paid by a business for its employees.
  • Premiums are paid after the policy has been donated to a charitable organization.

Life insurance premiums can be written off as a business expense if the premiums are being paid as part of a group term life insurance plan for employees. However, several requirements and limitations may apply.

Key man life insurance protects a business upon the death of an employee who is essential to its operation. These premiums are not deductible, but they are paid with pretax money, and the payout benefit is usually tax free.

In most cases, personal insurance premiums cannot be deducted from taxable income even in cases of self-employment. If the premiums are written off, the proceeds from the insurance benefit could be considered taxable income and would be subject to federal taxes.

Insurance premiums for retirees are not tax deductible. However, borrowing against a permanent life insurance policy can provide a tax-advantaged way to increase cash flow during retirement.

Want to learn more about life insurance?

A New York Life financial professional can answer your questions and help you determine the best type of life insurance to protect those you care about most.

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1Certain tax advantages are no longer applicable to a life insurance policy if too much money is put into the policy during its first seven years, or during the 7-year period after a "material change" to the policy. If the cumulative premiums paid during the applicable 7-year period at any time exceed the limits imposed under the Internal Revenue Code the policy becomes a “Modified Endowment Contract” or MEC. A MEC is still a life insurance policy, and death benefits continue to be tax free, but any time you take a withdrawal from a MEC (including a policy loan), the withdrawal is treated as taxable income to the extent there is gain in the policy. In addition, if you are under 59 ½, a penalty tax of 10% could be assessed on those amounts and upon surrender of the policy.