Insurance Tax Deductions: Is Life Insurance Tax Deductible?

Key Takeaway

It’s always great to get a break on your taxes, but your life insurance premiums are generally not tax-deductible. Why aren't life insurance premiums tax deductible? Insurance premiums are considered a personal expense. It’s true that monthly or annual premiums add up over time, but so do car loan payments, personal loans, student loans, and mortgage loans, and there’s no tax deduction on those personal costs, either.  

Unlike health insurance, there’s no federal mandate requiring you to buy life insurance, so taking on that expense is your personal choice rather than something the government is willing to reimburse you for. That’s the bad news about life insurance premiums. 

Tax deductible chart image for life insurance

Does Life Insurance Get Taxed?   

Is life insurance taxable? Well, that’s the good news. It turns out that life insurance provides favorable tax treatment in its own way: death benefits are typically not subject to income tax when your loved ones are the beneficiaries and receive the benefit payout. Each insurance situation is different, and we encourage you to speak to your tax professionals about your personal circumstances. 

Not only may that be a financial relief, but it means that during a time of loss and grief, your family or loved ones won’t have to worry about paying taxes on the money they receive from life insurance benefits—because the benefit payout is not regarded as income. (In certain circumstances, some states might impose life insurance taxes, so it’s worth having a conversation with a tax professional.) Having this financial cushion from your life insurance policy can help offer peace of mind, and possibly long-term security, for the people you love. 

If you die while the policy is active, your life insurance beneficiary will receive a lump sum that they can apply toward retirement, debt, or savings for the future. What they do with the policy payout is up to them. So if your loved ones ever ask, “Do we pay taxes on life insurance?” you can reassure them that the answer is likely no. 

When Are Life Insurance Premiums Tax-Deductible? 

Although most people can’t get a tax deduction for these insurance payments, there are certain exceptions for tax deductions: 

1) You own a small business and offer life insurance as a benefit to your employees.  

Some businesses are able to deduct the premiums they pay for their staff's life insurance. If your business qualifies, you can only deduct life insurance premiums for up to $50,000 of coverage. Note: you can’t deduct these insurance payments if you (or your business) is the beneficiary of a group policy. Similarly, this won’t work if your spouse works for your company, because you’d potentially benefit from the payout. 

2) You give the insurance policy as a charitable gift. 

Transferring ownership of a policy can be a savvy tax move. By giving your life insurance policy to, say, a favorite non-profit organization, or naming a charity as your death benefit beneficiary, you can give yourself a nice advantage at tax time. Because the life insurance policy is a charitable gift, the premiums you pay—or the cash value of the policy (whichever amount is less)—are indeed considered tax-deductible. 

3) You bought an insurance policy for a former spouse. 

Not all divorces count for a life insurance tax deduction. But if you have an alimony agreement that took effect prior to 2019, you should be able to take the tax deduction on your insurance policy. (Alimony agreements after 2019 don’t count for tax deductions because of some recent tax code changes.) 

What About Universal Life Insurance Cash Value?  

Is the cash value of universal life taxable? The cash investment portion of your universal life insurance grows tax-deferred (just as a traditional IRA does). That means when the money is withdrawn from the insurance policy, you’ll only owe taxes on the earned interest. 

To get more specific: ‘tax-deferred’ means the accumulation of investment earnings (interest, dividends, and so on) that you don’t have to pay taxes on until you withdraw the money. 

  • Financial Dependency: Consider who relies on your income for financial support, such as spouses, children, or elderly parents.
  • Familial Relationships: Take into account your relationship with potential beneficiaries and their financial needs.
  • Estate Planning Goals: Determine how life insurance fits into your overall estate planning strategy and how you’d like the death benefit will be distributed among beneficiaries.
  • Regular Review and Updates: It's essential to review and update your beneficiary designations regularly, especially after major life events such as marriage, divorce, or the birth of children.

The Big Takeaway on Life Insurance Tax Deductions 

So in certain cases you can deduct your life insurance payments from taxes, but in most cases, you can’t.   

Obviously, life insurance is a major investment, and a deeply personal matter. Regardless of your personal situation, it’s important to discuss any potential implications with a tax professional to correctly determine your deduction eligibility. Be sure to write down your tax and insurance questions ahead of time, so you’ll be fully prepared and ready for tax-deferred interest! Then give yourself a pat on the back for thinking ahead and taking such good care of the people you love, even after you’re gone.

ELO1603W (5-24) 

The information above is for educational use only and does not represent insurance, tax or legal advice. It is not a recommendation or solicitation to buy insurance. Please talk to your licensed insurance agent for more information about life insurance and your needs. Please consult with the appropriate professional for tax or legal advice. Guarantees are backed by the claims-paying ability of the issuing insurance company.

Article Author: Meredith Bell
Author Bio: Meredith joined Everly in 2022 and has 20+ years of experience in the life insurance industry. She has held various roles in advertising, marketing, communications, sales and distribution support, and product development. Outside of the office, Meredith lives with her daughter Kennedy and their dog Mavis. Meredith enjoys cooking, camping, gardening, hiking, and bourbon (though not always at the same time). She is a live music enthusiast and an avid reader. Her favorite quote is by Thomas Jefferson: "I cannot live without books." Meredith agrees, but would add cheese, movies, and dogs to that list.

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