Its tax time and you’ve got some questions. One of these is about the life insurance premiums you’ve been paying all year. They’ve amounted to a larger amount than you realized and you’re beginning to wonder if they might be tax deductible.
Good news, bad news
Unfortunately, the IRS has indicated that life insurance premiums you purchase in order to cover individuals in your own family aren’t tax deductible. This is because the IRS views the purchase of life insurance similarly to how they purchase disability insurance for lost earnings, or for loss of the use of a limb, eyesight, etc.
The good news is that beneficiaries of life insurance payouts generally don’t have to pay taxes on the money they’ve received from their policy. This money is not counted as income provided the policyholder was responsible for paying the premiums and associated taxes.
The exceptions: When you don’t have to pay taxes
There are a couple of situations where taxes aren’t required for life insurance premiums. For example in most situations, you don’t have to pay taxes for life insurance premiums that are required in an alimony agreement. Also, some employees that have taken part in a qualified plan like a 401K may purchase a minimum amount of coverage on a tax-deductible basis.
Some life insurance premiums are deductible as a business-related expense. This is true if you’re an employer and you pay premiums for your employees or officers. In these cases, you don’t pay premiums on those taxes provided you aren’t listed as a beneficiary of their policy. Note that there may be some variation on this rule depending on when the original policy was purchased. Also, the amount of coverage must be considered incidental according to government guidelines.
These situations are tricky with very specific rules for each case. If you think they may apply to you, consider contacting a qualified tax pro before filing so that you get it right and don’t have to deal with questions later.