Are Personal Life Insurance Premiums Tax Deductible?

Personal life insurance premiums are payments made by an individual to an insurance company to maintain a life insurance policy, which provides a financial benefit to designated beneficiaries upon the insured’s death. These premiums secure various types of policies, from term life, offering coverage for a specific period, to permanent life insurance, such as whole life or universal life, which can provide lifelong coverage and accumulate cash value. Understanding the tax implications of these payments is important for personal financial planning.

The General Rule of Non-Deductibility

Generally, personal life insurance premiums are not tax-deductible for federal income tax purposes. The Internal Revenue Service (IRS) classifies these payments as personal expenses, similar to household utility bills or personal transportation costs. This classification aligns with Internal Revenue Code Section 262, which states that personal, living, and family expenses cannot be deducted from taxable income.

This rule applies universally to individuals, regardless of employment status. Premiums paid for any personal life insurance policy, whether term or permanent, are not eligible for a deduction. The IRS views these premiums as expenditures for personal financial protection rather than for generating income.

Specific Situations for Deductibility

While the general rule prohibits deductibility, there are limited circumstances where personal life insurance premiums might be deductible. One exception involves alimony agreements established before January 1, 2019. If a divorce or separation instrument executed before this date requires one spouse to pay life insurance premiums for the other, those premiums may be deductible by the payer. For this deductibility to apply, the recipient spouse must own the policy, and the premiums must be paid directly by the payer. However, the Tax Cuts and Jobs Act of 2017 eliminated the deductibility of alimony payments, including related life insurance premiums, for divorce or separation agreements executed after December 31, 2018.

Another scenario where premiums might be considered for a deduction is when a life insurance policy is irrevocably assigned to a qualified charity. If the policy is gifted to a charitable organization, and the donor continues to pay the premiums, these payments may be considered charitable contributions. The deduction amount is limited to the lesser of the policy’s value or the donor’s cost basis (premiums paid to date). This charitable deduction is subject to annual limitations, up to 50% of the donor’s adjusted gross income, with any excess potentially carried forward for up to five years.

Other Key Tax Aspects of Life Insurance

Beyond premium deductibility, personal life insurance policies offer several other tax considerations. Death benefits paid to beneficiaries are exempt from federal income tax. Beneficiaries receive the full amount without income tax liability. However, death benefits can be subject to estate taxes if the policy is part of a large estate exceeding federal exemption thresholds, or if paid in installments where interest accrues.

Cash value within permanent life insurance policies grows on a tax-deferred basis. Taxes on accumulated earnings are not due until the money is withdrawn or the policy is surrendered. As long as the cash value remains within the policy, its growth is not subject to annual taxation.

Policyholders can also access the accumulated cash value through loans, which are tax-free as long as the policy remains in force. These loans are treated as advances against the policy’s cash value, not as taxable income. If a policy lapses or is surrendered with an outstanding loan, the amount borrowed could become taxable to the extent it exceeds the premiums paid.

Dividends from participating life insurance policies are considered a return of premium and are not taxable. This tax-free treatment applies as long as the total dividends received do not exceed the total premiums paid into the policy. If dividends exceed the cumulative premiums paid, the excess amount may be considered taxable income.