Once you’ve decided to look into buying term life insurance, it’s natural to consider ways to leverage that purchase into a tax advantage. You might wonder whether life insurance premiums are tax-deductible. For most of us, the answer is no.
Life insurance premiums are not generally tax-deductible because IRS Pub. 502 considers those costs a “personal expense.” If you are looking for some wiggle room, you are not going to find it in Pub. 502, which states specifically that life insurance premiums are excluded as a deductible expense.
Notwithstanding the above, there are a few situations where premiums might be tax-deductible. If your premiums are associated with one of the categories below, check with your tax advisor for more information:
- Life insurance purchased to secure alimony payments
- Life insurance owned by a charity
- Life insurance purchased by a business for its officers and employees, so long as the business is not a direct or indirect beneficiary
Are life insurance benefit payouts taxable?
Term life insurance proceeds are typically not taxable to your beneficiaries.
While life insurance benefit payouts are generally not taxable, in a few instances there may be tax ramifications for life insurance death benefits:
- Earning interest on death benefits (this is typically simple interest from the date of the insured’s death until the date of payout and beneficiaries should receive a Form 1099-INT with the amount of the interest paid)
- Utilizing an accelerated death benefit rider (this type of life insurance rider allows a terminally ill policyholder to access a portion of the policy’s benefits prior to death). Riders may be available at additional cost or may be included in the price of the policy, depending upon the policy’s provisions. Riders may have fees when exercised.
- Triggering of the estate tax (the tax only applies when your estate is worth more than $11.2 million for an individual or $22.4 million for married couples, although that number is always subject to change as the nation’s tax laws change)
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How life insurance benefit payouts affect estate taxes
Estate taxation deserves a special callout. Keep in mind that when you choose to name your estate as your beneficiary on your life insurance policy, your loved ones may ultimately be subject to estate tax on everything in the estate, including the life insurance death benefit.
As you might guess, there are numerous tax strategies for avoiding or minimizing estate taxes (including transferring your policy to an irrevocable trust), so make sure to consult your tax advisor with questions.
No sales tax on life insurance premiums
While there is no tax deduction for life insurance premiums, you will not have to worry about paying sales tax on those premiums. Unlike other personal purchases such as clothing or video game consoles, the premium price will be the price you pay, with no sales tax.
Term life insurance is affordable even without a tax deduction
Regardless of tax considerations, term life insurance remains a valuable product to help financially protect your loved ones. And, this peace of mind can come at an affordable price. For instance, a 30-year old woman in excellent health could pay only $30.23 in monthly premiums for a 30-year, $500,000 Haven Term policy, issued by MassMutual. Easily get a ballpark idea of what your premiums might be for similar coverage using a price estimating tool.
Tax issues can be complicated, so it is always helpful to check in with your tax advisor for specifics regarding your personal situation.
Rachel Parisi is a freelance writer and attorney. She focuses her writing on insurance, financial services, and employee benefits. In her previous life, she served in the United States Air Force as a missile combat crew commander (think ‘WarGames’).
Haven Life Insurance Agency does not provide, nor is the information here written or intended as, specific tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.