One of the benefits of life insurance is tax deferral – you pay taxes when you withdraw the money, not in advance. Plus you don’t have to pay taxes on the proceeds of a life insurance payment. However, the premiums you pay on life insurance policies are generally not tax deductible except in certain circumstances.
Are life insurance premiums tax deductible?
The IRS views life insurance premiums as a personal expense that is not tax deductible. However, if life insurance is a business expense, it may be tax deductible. It is important to speak with your tax professional to determine if your premiums are deductible.
Cancellation of life insurance premiums as business expenses
Premiums on life insurance policies may be tax deductible if they are business expenses, Mark Williams, CEO of International brokers, Insider said. He gave the following example:
Two business partners own a 50/50 stake in a business enterprise with the right to purchase the other’s stake in the event of death. They bought a work life insurance policy and wrote off the premiums as work expenses.
If a business offers group life insurance to its employees, it can be written off as a business expense. IRS Rules âProvide for an exclusion for the first $ 50,000 of group life insurance coverage provided under a policy purchased directly or indirectly by an employerâ.
However, IRS Rules state that “you cannot deduct the cost of life insurance coverage for you, an employee or anyone with a financial interest in your business whether you are directly or indirectly the beneficiary of the policy.”
It’s important to talk to your accountant to make sure you understand when you can deduct taxes. The IRS has specific rules regarding the deduction of taxes on life insurance.
Amortization of premiums as a charitable contribution or as part of a support agreement
If you purchase a life insurance policy and name a charity as the beneficiary, Loyalty life stated that “the premiums you have paid to the policy or the overall cash value of the policy, whichever is less, is considered a tax deduction.”
In some states, life insurance is required as security for child or spousal support, Kimberly A. Cook, Senior Mediator at Dovetail conflict resolution, Insider said. Cook suggests not only speaking to your divorce attorney, but also including your estate planning attorney and accountant in these discussions, as if life insurance is required in your state it could span several. years.
If you have spousal support or alimony prior to 2019, where the judge ordered life insurance as part of the agreement, you may be able to write off those premiums depending on IRS Rules. Unfortunately, alimony and spousal support agreements after December 31, 2018 are not eligible.
Life insurance payments are not taxable, with a few exceptions
Although you cannot write off the premiums you pay on your life insurance, if you are the beneficiary of a life insurance policy, you not pay taxes on the death benefit. However, there are a few exceptions to this rule.
Mark Williams, CEO of International brokers, told Insider that one case where life insurance beneficiaries may have to pay taxes is if the death benefit includes a cash value payment.
The cash value is a unique feature of permanent life insurance policies. All permanent life insurance policies have death benefits as well as a cash value that increases with a tax deferral. The big difference between types of permanent life insurance policies is how they handle cash value – in the insurance company‘s portfolio, the stock market, or annuities.
Williams cautioned that because the money inside the policy (cash value) has increased on a tax-deferred basis, you will pay taxes on the cash value when the policy is surrendered or if it is. paid to a beneficiary.
It is wise to consult your accountant, lawyer, and financial advisor before making any life insurance decisions to best maximize your tax benefits.