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