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:
Requires you to pay for life insurance on your ex-spouse
Went into effect before 2019
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.
Frequently asked questions
What type of life insurance is tax deductible?
No type of personal life insurance is tax-deductible. The only exception is if you donate your policy to charity or in certain divorce agreements before 2019.
Can you write off life insurance if you’re self-employed?
No, life insurance isn’t tax deductible if you’re self-employed and you’re paying for your own policy.
Do you have to report life insurance on your taxes?
You don’t have to report your own life insurance on your taxes because it’s considered a personal expense. Life insurance payouts don’t have to be reported as income as long as they’re paid in a lump sum.
