Table of Contents
Key Takeaways
- Life insurance premiums are typically not tax-deductible for individuals and families, but exceptions may apply for certain business coverage.
- Tax deductions can lower taxable income and potentially lead to a smaller tax payment or a larger refund.
- Life insurance death benefits are usually not subject to income tax for beneficiaries.
- Life insurance policies with cash value allow tax-free gains and withdrawals up to the total premiums paid.
- While life insurance premiums may not be tax-deductible, the primary benefit lies in helping provide financial security for loved ones.
It can be nice to get a break on your taxes, and it's smart to look for all allowable tax deductions. For life insurance, it may depend on how you're using it.
Are Life Insurance Premiums Tax-Deductible?
For individuals and families who buy life insurance to replace income in the event of an untimely death, premiums are typically not deductible. However, it's important to review the details of your situation with a tax expert. This can help you can get a more definitive answer, and you may be able to brainstorm other ways to help reduce your tax burden.
Generally, life insurance policies already have favorable tax treatment. A life insurance death benefit is typically not subject to income tax when your beneficiary receives the money.
It may be possible to deduct life insurance premiums in certain situations. For example, some businesses that provide coverage to employees might be able to deduct those employee benefit costs. However, the rules can be complicated , so it's important to review the details with a tax professional before you make any decisions.1
What Are Tax Deductions?
A tax deduction is an item on your tax return that can help lower your taxable income. When you report tax deductions, you will likely pay less income tax for the current year. That may mean making a smaller payment to the IRS or receiving a bigger refund. Plus, you may qualify for certain tax credits or other benefits with a lower taxable income. As a result, whenever you spend money, it can be helpful to find out if costs are tax-deductible.
Common tax deductions might include things such as student loan interest or contributions to a health savings account (HSA), if you're eligible.2 However, each deduction has specific rules and a tax professional can help you sort through the details.
Other Potential Tax Benefits of Life Insurance
Even if you can't get tax deductions for your premiums, there are other potential tax benefits of life insurance. Again, your beneficiary typically won't have to pay income tax on the death benefit, although some states might impose taxes in certain circumstances. If your life insurance policy has cash value, you will not owe income tax on the gains as long as you leave the cash value in your policy.
You can also withdraw money from your cash value without creating a tax liability as long as you withdraw less than what you paid in total premiums, according to the IRS.3 If you withdraw more than what you've paid in premiums, you may owe taxes. Keep in mind that any withdrawal may reduce the cash value and death benefit, and cause the policy to lapse.
The Bottom Line
Are life insurance premiums tax-deductible? For most individuals and families, the answer is no. But that doesn't mean you don't get any tax benefits from your life insurance policy. Your beneficiary will generally receive a death benefit that they do not need to pay taxes on, which may help them to keep life as normal as possible after a loved one passes.
Ultimately, the value of life insurance is the death benefit. This type of insurance can help to provide resources for loved ones and help ensure that they have a financial cushion if somebody dies. Any tax benefits on top of that can be a nice bonus. For more information, consider speaking with a tax professional.
Sources
- Guide to Business Expense Resources. https://www.irs.gov/forms-pubs/guide-to-business-expense-resources#en_US_2019_publink1000208680.
- Credits and Deductions for Individuals. https://www.irs.gov/credits-deductions-for-individuals.
- Taxable and Nontaxable Income 2023. https://www.irs.gov/pub/irs-pdf/p525.pdf.
