If you're like most life insurance policyholders, you're committed to ensuring that your family remains comfortable and solvent after your death. Whether your life insurance policy is structured as a temporary "term" plan or a permanent "whole" plan, chances are good that you've purchased enough coverage to support your family for many years to come. Unfortunately, your premium payments might be acting as a drag on your short-term budget. Depending upon the size of your policy, your life insurance payments could add up to several hundred dollars per month. In order to reduce this burden, you might be thinking about claiming these payments as a tax deduction or business write-off.
According to the IRS, private taxpayers and business owners are not permitted to claim their life insurance premiums as a tax deduction. This is due to the fact that life insurance benefits generally aren't subject to regular taxation. Since the vast majority of life insurance beneficiaries aren't required to pay taxes on the benefits that they receive, it would be redundant for the IRS to provide policyholders with a tax break. In effect, life insurance policies function like Roth IRA plans: Whereas their premium contributions can't be subtracted from the policyholder's taxable income, their benefits accrue on a tax-free basis.
There are certain situations in which life insurance benefits may be taxable. For instance, a business that purchases an individual's life insurance policy for investment purposes might be required to pay taxes on its eventual proceeds. In this special circumstance, the business's principal might be able to claim the policy's ongoing premiums as a business expense. If the policy results in a payout, its proceeds would remain taxable at regular capital gains rates. If the policy expires without issuing a payout, the principal might be required to pay back the entire taxable value of the deducted premiums. This is a rare, complicated tax situation. If you find yourself grappling with such a scenario, you should talk to a licensed tax professional to determine your exact tax liability.
For private taxpayers, the benefits that accrue on unusually large employer-sponsored group term life insurance plans may also be taxable. If you hold such a policy, you may have to pay taxes on some of the contributions that you make on it. Likewise, the policy's beneficiary will have to pay taxes on any death benefits that exceed the IRS's $50,000 payout limit. If your policy pays out a benefit of $150,000, your beneficiary will have a tax liability of $100,000.