Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Sep 16, 2021

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Insurance Q&A: “Is life insurance tax deductible on my tax return?”

Who’s Asking?

The answer depends on who’s asking. Generally, personal life insurance premiums are not tax deductible.

So if you have a term life or whole life insurance policy, you are not able to deduct the premium payments on your annual tax filing.

On the other hand, your employer may deduct their portion of your life insurance premium if they sponsor the policy, as it is one of their many costs of doing business. If the employer pays the entire premium to the life insurance companies, they can deduct the full amount from their earnings for the year.

Group policies are generally considered taxable income because the company that sponsors them must pay taxes on the benefits paid out under these plans.

Employers are also allowed to deduct any partial payments they make if they share in the overall expense. This is probably more common than them paying for all of it.

For the record, an individual isn’t able to deduct their portion of the life insurance expenses even when shared with an employer. You’re simply out of luck on the tax side of this equation.

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What if I own my own business?

Self employment can be a gray area when it comes to life insurance business expenses and tax deductions. Just like your insurer, the Tax Man has seen it all when it comes to business expenses and is not easily fooled by a business owner who attempt to take advantage of the code.

While your tax advisor is the best person to talk to about this topic, you can generally expect that if your company is small enough (sole proprietor), or your company life insurance plan is only set up to insure you, as the company owner you probably won’t receive a tax break for the premiums paid.

You might have some wiggle room if your company’s life insurance program sponsors (or is offered to) every employee. This can get complicated, so again, speak to your tax advisor to make sure you are not on the wrong side of legal here.

One Silver Lining!

There is a potential silver lining when it comes to life insurance and taxes on life insurance. Since life insurance premiums are not tax-deductible, the policy payout may not be taxable either.

This means that if you die before retirement age, there could be no federal estate tax due at death. The state will likely still impose its own inheritance tax, but since most states don’t allow estates over $5 million to escape taxation entirely, this should not pose much concern.

If you do pass away during retirement, however, then you would owe both federal and state estate taxes based upon how large your estate was prior to passing.

In most cases, the benefits of a life insurance program are typically not taxed when they are paid out. Of course, you’re not going to be around to enjoy that, but your beneficiary will take comfort in that and that’s really who the policy was purchased for in the first place.

But, just like there are exceptions with tax deductions for premiums, there are exceptions to the taxability of benefits. Be sure to discuss this with your life insurance agent and your tax advisor when evaluating your coverage needs in the first place.

When Tax Deductions Don’t Matter

You may find that the potential savings from a tax deduction on life insurance premiums pale in comparison to how much you can save by simply shopping your premium with multiple insurers.

After all, you may be throwing money out the window by paying too much for your policy in the first place.

Shop your premium and gather life insurance quotes to ensure your bottom line is protected…paying less by switching life insurance companies could outweigh any tax benefits.

Read more: What do insurance companies test for life insurance?

(photo: gfpeck)