Life insurance provides benefits to your family when they need it after your death. But, during your lifetime, life insurance provides many tax benefits. You must understand the benefits provided by life insurance and whether or not these benefits should be included on your taxes prior to doing your taxes. If you incorrectly report life insurance on your taxes, you could face stiff penalties from the IRS.
The IRS does not allow premiums paid on your life insurance to be included on your tax return. This is regardless of your financial circumstances. Premiums paid are not considered an itemized or miscellaneous deduction. Because of this, all premiums are paid on an "after-tax" basis.
When you use life insurance for business purposes, you may be able to deduct the premiums paid on the policy. Business owners who purchase a policy on their own life or the life of their employees and then keep the ownership of the policy with the employee (outside of the company) enjoy a tax deduction on any premiums the business pays toward the policy. These premium payments are considered a business expense in the form of an employee bonus. Life insurance policies that are owned as part of a group life insurance plan may be tax-deductible. Premiums used to support up to $50,000 worth of death benefit are eligible for a deduction. Any amount over this is not deductible. Finally, when a business owns a life insurance policy on the lives of its employees, or uses the policy as part of a non-qualified retirement plan, the business cannot deduct those premium payments until benefits are paid out to the employee.
The death benefits, regardless of whether the policy is corporate-owned or privately owned, are income tax-free. This also means that the proceeds do not need to be included on a tax return. The proceeds are simply paid out to the beneficiary named on the policy after proof of death of the insured is received and a claim form is filed with the life insurance company.
The cash value of a life insurance policy is not reported on a tax return. The cash value buildup is tax-free inside of the policy. All policy loans are considered loans and thus not reportable. Withdrawals from the policy are only reportable if they exceed your basis in the policy. Your basis is the total amount of money you've paid into the policy as premium payments.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- "Life Insurance"; Kenneth Black Jr., Harold D. Skipper Jr.; 1994
- IRS: Publication 525