While the answer is generally no, life insurance still comes with some tax advantages that could save your family money. The payout from a policy generally isn’t subject to income tax, which can be a big benefit to your family during a tough time. Depending on your situation, you may be able to work with a tax expert to take advantage of other tax breaks with your policy.

With Tax Day on the horizon, it’s good to know which deductions are available to you.

Here’s what you need to know about life insurance and taxes.

Are life insurance premiums tax deductible?

You generally can’t deduct your life insurance premiums on your tax returns. In most cases, the IRS considers your premiums a personal expense, like food or clothing. Life insurance is also not required by your state or federal government, so you can’t expect a tax break after buying a policy.

However, if you die while the policy is still active, your loved ones receive a tax-free cash payment to replace your income, pay bills or debts, save for the future, or buy whatever else they choose (read on for more details on the tax advantages of life insurance).

While you typically can’t deduct premiums, there are several exceptions. You may be able to deduct some or all of your life insurance premiums if you:

• Have a business and offer benefits. Certain business types, like LLCs, S Corporations, and sole proprietors, can deduct premiums they’re paying on behalf of employees. If you own a small business that qualifies for this deduction, you can only deduct premiums for up to $50,000 of coverage. You’re also not allowed to benefit from the policy in any way, so you can’t deduct life insurance premiums if you or your company is the beneficiary of a group policy.
• Have an older alimony agreement (pre-2019). The Tax Cuts and Jobs Act permanently altered tax codes for post-2018 alimony agreements. When you file for divorce, the judge in charge of your case may require you or your partner to buy life insurance as part of the alimony agreement. Due to tax code changes, no alimony payments, including life insurance payments, will be considered tax deductible if your agreement was made after December 31, 2018. Also, you won’t be able to deduct premiums from policies you purchased before the divorce that name your ex-spouse as the beneficiary.
• Give a policy as a charitable gift. Transferring ownership of a policy is often an advantage at tax time. If you plan to give your life insurance policy to your favorite charitable organization or name the charity as your beneficiary, you can receive a tax benefit. As a charitable gift, the premiums you paid into the policy or the policy’s overall cash value, whichever is less, is considered a tax deduction.

Depending on your situation, there may be other exceptions that apply to you. To learn more about how life insurance policies affect your taxes, talk to your accountant or a tax professional familiar with your circumstances, so they can advise you on your options.

What is a tax deduction?

A tax deduction is a line item on your annual tax return that may lower your taxable income. There are certain, qualifiable tax credits or benefits that you can claim on your taxes to receive a bigger refund from the IRS.

For example, when you donate household items to a local thrift store, the organization may ask if you want a receipt. This receipt would allow you to write off the value of these items on your tax return as tax deductible, which means you can subtract their value from the overall amount that you owe to the government or add them to the amount that the government owes you. There are specific rules and regulations on which items can be included in your tax deduction, so it’s best to consult with a tax professional to advise on what you can and can’t write off on your taxes.

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Tax advantages of life insurance

The biggest tax advantage of  life insurance is that the death benefit payout is not considered taxable income. Payouts are funded by the monthly or yearly premiums the policy owner pays to keep the policy active. And since those premiums are paid for with after-tax income, that money can’t be taxed twice.

So while life insurance payouts aren’t tax-deductible, they come with some advantages. Your beneficiaries won’t need to claim payouts as income, a huge bonus if you’re on the receiving end.

Keep in mind that this rule also has a few exceptions, depending on the type of policy, how your payout is being distributed, and other factors. Taxes can get complicated, especially when there are so many deductions to consider. Knowing where you stand with your life insurance policy can help you save when tax season rolls around again.

Even if you don’t qualify for tax deductions this time around, remember that your life insurance policy is an investment in your future. While permanent plans cover you for a lifetime, term life offers flexible, affordable peace of mind for you and your family. Like auto or homeowners’ insurance, you pay a smaller amount upfront to get the protection you need when you need it.

Can a business owner write off life insurance policies for their employees?

Yes, as a business owner, you’re able to deduct premiums for life insurance policies as long as those policies are owned by company executives and employees and are paid for by your business.

So when is life insurance tax deductible? If you offer group term life insurance to your employees, you can deduct premiums that they pay up to $50,000 of coverage per employee. In other words, if an executive or employee reports their employer-owned life insurance premium as income, then you’re able to also write off this expense as their employer.

Do you pay taxes on life insurance for the accumulated cash value?

If you have a permanent policy with a cash value component, you won’t have to pay taxes on the cash value in the policy unless you withdraw. As long as you continue growing your cash value, the cash value is tax-deferred. However, if you decide to surrender your permanent life insurance policy and want to use it as collateral to pay off a mortgage or other expense, then your cash value will be tax-free only up to the amount you’ve paid in total premium payments. For example, if you’ve paid $10,000 in premiums, then accumulated an additional $5,000 in interest, you would be taxed on the $5,000 earned. The beneficiary who receives your death benefit will also have to pay taxes on any interest accumulated on your life insurance cash value component, too.

Still have questions about your life insurance policy?

At Fidelity Life, we’re committed to making the world of life insurance simple and accessible to all. Our team is here to help you assess your unique needs and get you the coverage you need. Get in touch with us to talk to an agent or start your online quote today.

At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible.