To keep a life insurance policy active, you pay premiums monthly or annually. Those life insurance premiums aren’t tax-deductible because the IRS considers them personal expenses — with rare exceptions. If you’re a business owner offering life insurance to your employees, for example, you can write off those premiums as a business expense.
Other instances where life insurance premiums can be tax-deductible include if you donate your policy to a charity or if you have an alimony agreement that went into effect before 2019 that requires you to pay for life insurance on your ex-spouse. Consult with a tax professional to determine if your life insurance premiums are deductible.
If you bought a life insurance for yourself — meaning it pays out upon your death — you can’t deduct life insurance premiums.
Key takeaways
The IRS considers life insurance a personal expense and ineligible for tax deductions.
Employers paying employees’ life insurance premiums can deduct those payments, with some restrictions.
Policies bought as part of child or spousal support agreements before 2019 are tax deductible.
Donating your policy to charity makes any future premiums tax deductible.
Are life insurance death benefit payouts taxable?
One of the tax benefits of life insurance is that when you die and your beneficiaries receive the death benefit, the payout they get is tax-free. A death benefit payment isn’t considered income on their income tax return as long as it’s paid in a lump sum.
When can you write off life insurance premiums?
There are a few times when you can deduct your life insurance premiums on your tax return: If you’re an employer offering an employee benefit, if a divorce agreement requires you to buy a policy on your spouse, or if you donate your policy to charity.
Small-business owners offering group life insurance
Owners of certain types of businesses, including LLCs and S corporations, can deduct premium payments they make for their employees.
Group life insurance premiums may be tax-deductible if:
You provide life insurance as an employee benefit, also known as group life insurance, and neither the business owner nor the company are the policy’s beneficiary.
You offer up to $50,000 in coverage. The IRS treats premiums paid for coverage above this amount as employee wages, [1] which you can’t deduct from taxes.
Premiums are ineligible for a deduction if:
You’re self-employed, also known as a sole proprietor. Even though you can deduct other expenses, like health insurance, life insurance is excluded if you’re paying for your own policy.
Your spouse is an employee of your company. If their policy pays out to you, you (the business owner) would benefit. That would disqualify you from a deduction.
People with alimony agreements from before 2019
Life insurance tied to divorce proceedings is usually not tax-deductible. The exception is if you have an alimony agreement or divorce decree that both:
Any alimony agreements that took effect in 2019 or later aren’t eligible for this deduction because of tax code changes prompted by the Tax Cuts and Jobs Act. [2]
If your alimony agreement says you have to name your ex-spouse as the beneficiary of your own policy, those premiums aren’t deductible. A tax or legal professional can answer any additional questions you have about your divorce agreement.
Donating your policy to charity
If you donate your life insurance policy to charity, then any premiums you pay toward the policy after the date of the donation are tax-deductible. This is usually done with a permanent life insurance policy (you could donate a term life insurance policy, but if you outlive the term then the charity doesn’t get anything).
People with a high net worth sometimes use this as a way to reduce their taxable assets. But if, like most people, you’re buying a policy to ensure your family has financial support when you die, this option won’t satisfy your needs.
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When do you have to pay taxes on life insurance?
Generally, your beneficiaries won’t pay taxes on life insurance benefits and you don’t need to pay any taxes on your policy during your lifetime. But there are a few exceptions, which mostly apply to policies with a cash value.
Selling your own life insurance policy: You can legally sell your life insurance policy if you don’t need it. Any profit is taxed as income.
Surrendering permanent life insurance for cash: If you give up a permanent policy, you may get some of the cash value funds in return. If you get back more than you paid into the account (the principal), that amount is taxable.
Withdrawing from your policy’s cash value account: Cash value earns tax-deferred interest like investment accounts. If you want to withdraw from your cash value, you’ll pay taxes on any amount above the principal.
Your beneficiaries get the death benefit in installments: If your beneficiaries opt to receive benefit payments as an annuity, the unpaid money may earn taxable interest.
Except for specific circ*mstances, life insurance is considered a personal expense and is not tax-deductible. If you have questions about the tax implications of your life insurance policy, a licensed financial advisor or insurance agent can give you personalized advice.
FAQs
To keep a life insurance policy active, you pay premiums. Premiums are typically paid monthly or annually. monthly or annually. Those life insurance premiums aren't tax-deductible because the IRS considers them personal expenses — with rare exceptions.
Is a life insurance policy tax deductible? ›
Life insurance premiums are not tax-deductible for most people. If you're a business owner and premiums for your employees are a business expense, they may be deductible. Life insurance payouts are typically not taxed, though if the deceased person's overall estate is very large they may be subject to estate tax.
Do I need to claim life insurance payout on my taxes? ›
Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them.
Are personal life insurance premiums usually deductible? ›
Life insurance premiums—which are classified as a personal expense by the IRS—cannot be deducted on your federal tax return.
Are life insurance losses tax deductible? ›
It is treated as a personal asset and losses resulting from the sale or disposition of personal assets are not deductible. 8 | Is loan interest paid on a life insurance policy tax-deductible? No, interest paid on loans from individually owned life insurance contracts is generally not deductible.
Can self-employed deduct life insurance premiums? ›
In most cases, life insurance for business owners is not tax deductible. Even if you're self-employed, you cannot subtract your premium payments from your total income each year. As a business owner, however, you can offer life insurance policy coverage as an employee benefit.
Can I deduct insurance premiums from taxes? ›
Health insurance premiums are deductible on federal taxes, in some cases, as these monthly payments are classified as medical expenses. Generally, if you pay for medical insurance on your own, you can deduct the amount from your taxes.
Do you get a 1099 for life insurance proceeds if you? ›
Do you get a 1099 for life insurance proceeds? You won't receive a 1099 for life insurance proceeds because the IRS doesn't typically consider the death benefit to count as income.
When you cash out a life insurance policy, is it taxable? ›
Cashing out your policy
You're able to withdraw up to the amount of the total premiums you've paid into the policy without paying taxes. But if you withdraw on any gains, such as dividends, you can expect them to be taxed as ordinary income.
Does the IRS know when you inherit money? ›
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300.
If you borrow your whole life insurance cash value through a loan, you can take the money out without owing taxes.
Is homeowners insurance tax deductible? ›
Some taxpayers have asked if homeowner's insurance is tax deductible. Here's the skinny: You can only deduct homeowner's insurance premiums paid on rental properties. Homeowner's insurance is never tax deductible your main home.
Is car insurance tax deductible? ›
Car insurance is tax deductible as part of a list of expenses for certain individuals. Generally, people who are self-employed can deduct car insurance, but there are a few other specific individuals for whom car insurance is tax deductible, such as for armed forces reservists or qualified performing artists.
What type of life insurance is tax-deductible? ›
Group life insurance premiums may be tax-deductible if: You provide life insurance as an employee benefit, also known as group life insurance, and neither the business owner nor the company are the policy's beneficiary. You offer up to $50,000 in coverage.
Do you have to claim life insurance money on your taxes? ›
In general, the payout from a term, whole, or universal life insurance policy isn't considered part of the beneficiary's gross income. This means it isn't subject to income or estate taxes. Payout structure. Life insurance proceeds paid in a lump sum are generally received by the beneficiary tax-free.
Do you have to pay taxes on money received as a beneficiary? ›
Inheritances are not considered income for federal tax purposes, whether you inherit cash, investments or property. However, any subsequent earnings on the inherited assets are taxable, unless it comes from a tax-free source.
Are funeral expenses tax deductible? ›
Funeral expenses aren't tax deductible for individuals, and they're only tax exempt for some estates. Estates worth $11.58 million or more need to file federal tax returns, and only 13 states require them. For this reason, most can't claim tax deductions.
Do you get a 1099 for life insurance proceeds? ›
You won't receive a 1099 for life insurance proceeds because the IRS doesn't typically consider the death benefit to count as income.
Are accidental death insurance premiums tax deductible? ›
The IRS doesn't allow you to deduct premiums you pay to maintain accident insurance coverage. The payout may be taxable if you have accident insurance through your employer and the employer pays for your coverage.
Is cash in a life insurance policy taxable? ›
The earnings on the cash value of your life insurance policy usually grow tax-free or tax-deferred, but you might owe taxes if you withdraw the money. You'll generally owe taxes on money earned from investment or interest gains, known as your “above basis” amount.
