If you’re wondering if you can claim life insurance premiums as a business expense, the answer (like many tax questions) is, “It depends.”
Whether you can claim the expense is dependent on who benefits from the policy, and even in cases where you can claim life insurance as a business expense, you may not want to.
If you, as a business owner, are the direct or indirect beneficiary of the life insurance policy, you can’t deduct your life insurance as a business expense. If you’re self-employed and would like to deduct your life insurance premiums as a business expense, it’s not possible, as the IRS prohibits that practice.
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Claiming Life Insurance as a Business Expense
There are some cases where a business can claim life insurance premiums as an expense. However, depending on the intent of the policy, you may not want to claim the expense.
If the life insurance premiums were claimed as a business expense, the proceeds of the policy become taxable to the beneficiary. By taking the deduction on the business tax return, you’ve slashed the policy’s death benefit by as much as 40 percent. Taking the expense on your business taxes creates an instant tax liability for the beneficiary, possibly preventing the policy from serving its intended purpose.
It’s likely that the person who is insured by the policy thinks he is insured for the face value — and he is, but the beneficiary will have to pay the IRS as well as any applicable state taxes.
This perception that the life insurance policy will provide the full face value (tax-free) becomes relevant when you consider that more people are insured by group life insurance policies through an employer than by individually-owned life insurance policies.
For a seemingly growing number of households and individuals, the group life policy they have through their employer is the only life insurance coverage they have at all.
When Can I Claim Life Insurance Premiums as an Expense?
Small businesses and corporations can claim life insurance as a business expense and often do. Life insurance is frequently provided as an employee benefit, along with health insurance. In this case, it’s common for businesses to deduct the cost of premiums along with any other employee expenses.
Common Types of Life Insurance by Businesses
Group Life Insurance
Employers often offer group health insurance, the premiums for which can be deducted as a business expense. A smaller percentage of employers also offer group life insurance policies,and yes, the life insurance premiums can be claimed as a business expense, similar to health insurance.
However, according to the IRS, health insurance isn’t considered taxable, even though the business can deduct the expense. Group life insurance premiums, on the other hand, can be deducted as an expense but claiming the expense makes the proceeds of the policy taxable to the beneficiary.
Group life policies can be a great benefit and without any initial cost to the employee, there’s really no reason for an employee not to accept the benefit.
It is, however, a benefit that isn’t always well understood, leaving many employees under the impression that they are insured for X amount by the group policy, when the real-world math of their coverage is much less after the tax man takes a bite.
Key Man Life Insurance
Key man life insurance, also called key person life insurance, is a common way for businesses to protect themselves against potential financial loss due to the death of a key employee. With this type of life insurance, the business becomes the beneficiary because the business would suffer a significant financial loss without that key employee.
In a small business, the key person might be an owner or founder but can also be an employee who would be difficult or impossible to replace and whose absence from the business might threaten the business’s survival.
Imagine if you owned a French restaurant and the main draw of your business is one world-renowned chef who creates culinary masterpieces. If that chef unexpectedly dies, the prospects for your restaurant business begin to look grim.
A key man life insurance policy that insures that chef would pay the proceeds of the policy to the business, allowing you to cover expenses while you seek a high-dollar replacement chef, or close down your restaurant venture gracefully, possibly repaying investors and creditors with the proceeds of the key man life insurance policy.
Business income tax rules regarding business expense deductions for key man insurance become particularly murky. The consensus, or as close as the accounting community has come to reaching a consensus on this topic, is that you can’t claim the policy premiums if the business is the beneficiary of the policy.
5 Best Life Insurance Companies
It’s never been easier to get a cheap life insurance policy for just a few dollars a month. Start your search with our favorite low-cost life insurance policy providers.
If the premium price is your main concern when you’re shopping for life insurance, TIAA should be one of your first stops. The company has policies available for as little as $10 a month and its online quote tool will serve you a result in as little as a few minutes.
Consistently one of the highest-rated insurance providers in the United States, TIAA is also available in most states and areas of the country. You can choose to get started online using its unique “Wizard” tool, or you can contact a representative to guide you through the process and help you choose an option.
TIAA offers a few different term options, ranging from 10-year policies to 30 years of protection. At any time during your policy, you can choose to switch over to a permanent policy. Whether you choose a term plan or a permanent plan, TIAA’s policies are renewable.
A quick and easy choice for anyone who wants to get protected today, TIAA’s low-cost policies are comprehensive and affordable for anyone.
2. State Farm
Having trouble finding coverage in your area? Chances are that State Farm has a policy option that’s right for you. Operating across the United States, only 3 states are excluded from State Farm’s term life insurance options — New York, Massachusetts and Wisconsin.
Residents of all other states can get a comprehensive term life policy and some of the best customer service in the insurance realm.
State Farm also has a very generous conversion policy if you decide that you want to switch to a permanent plan. Policyholders under the age of 75 can switch at any time without taking another medical examination.
State Farm’s policies are a bit pricier than competitors like TIAA and Banner Life — 10-year plans start at about $15 per month and 30-year coverage options will usually cost you at least $19 in monthly premiums. Shoppers who want to take advantage of the company’s nationwide status or easy conversion options can with just a few extra dollars every month.
Transamerica offers a wide range of term life insurance options, with protections beginning at $25,000 and going all the way up to $10 million. If you have a very high net worth, you may also be able to get even more upon individual consideration.
Though most life insurance companies require policy applicants to get a health examination before they’re accepted for a policy, Transamerica may allow you to skip the exam if you’re under a certain age and you don’t smoke.
Transamerica is one of the best policy providers for flexible coverage choices. You can add riders for end-of-life care, additional financial coverage for accidental death and even critical illness coverage that begins to pay out while you’re still alive under certain circumstances.
Though Transamerica’s policies are pretty expensive if you’re a smoker (tobacco users pay about $100 more per year for their policy), you’ll get an excellent reputation and personalized choices with Transamerica.
4. Pacific Life
Pacific Life is a unique insurance company that offers a wide variety of interesting policy structures. In addition to its standard term and permanent insurance policies, Pacific Life also offers an indexed life insurance option, which provides stock market-connected death benefit growth over time.
This can save you money with your policy — as well as leave a nest egg behind for your children or grandchildren.
Pacific Life is also one of the most affordable life insurance providers for smokers. While smokers looking for a policy with Transamerica may pay as much as $50 a month for their coverage, plans for tobacco users are available from Pacific Life for as little as $17 a month.
If you aren’t quite ready or able to quit, Pacific Life might have the key to affordable insurance.
5. Legal & General America
Banner Life is one of the top insurance providers in the country. Its history dates back over 136 years, 1.3 million current customers and A-level financial ratings from multiple advisory groups.
You know that your future is secure when you choose a policy though Banner Life. Though the original Banner and William Penn corporations still underwrite Banner’s policies, a new owner (Legal & General America) has focused on lowering life insurance expenses.
Term policies from Banner Life are affordable and available for as little as $12 online. Getting a quote is simple and can be done online or over the phone. Their premium payment structure is unique and convenient. You can choose whether you’d like to pay your premium in one lump yearly sum, on a monthly basis or anything in between.
Its website and policy choices are simple and easy enough for anyone to understand. A reliable and affordable choice, Banner policies are still a fantastic choice when it comes to life insurance.
Rules regarding life insurance as a business expense vary depending upon the business structure and the beneficiary of the policy. Lots of business owners get themselves into hot water — or at least lukewarm water — with the IRS for taking improper deductions.
After the business taxes are paid, it’s business as usual and any available cash is used to fund the business, as usual.
If you’re self-employed or a business owner who would benefit directly or indirectly from the life insurance policy, unfortunately the IRS says you can’t claim life insurance as a business expense.
In other cases, you might be able to claim life insurance as an expense, particularly in the case of group life insurance provided as a employee benefit.
When in doubt, don’t guess on this one. Ask a business financing and/or accounting expert.
Learn more information about life insurance costs and payouts.
Frequently Asked Questions
1) Q: What are the advantages of term life insurance?
A term life policy allows you to purchase coverage at a guaranteed premium for a limited amount of time. This structure makes term life an affordable choice to protect your family if you have a financial commitment that won’t last forever, like a mortgage or the cost of raising kids. A 20-year term life insurance policy is the most popular life insurance policy purchased to protect loved ones if the unexpected happens. Get a quote here from top providers.
2) Q: What are the advantages of whole life insurance?
Whole life insurance, along with universal life insurance and some other variants, is designed to provide coverage for your entire life. This differs from a term policy that offers guaranteed premiums for a limited time. Permanent life insurance has a savings or investment element that helps the policy to build cash value, making it an asset that can be borrowed against or even sold if you no longer need the policy.
3) Q: Is life insurance taxable?
In most cases, the death benefit paid to life insurance beneficiaries is tax-free. However, if the policy premiums were taken as a deductible business expense, there may be a tax liability. There is also the possibility that a life insurance payout can change the way an estate is taxed.