Is whole life insurance tax deductible? We get this question a lot, and for almost all cases, the answer is: no, it’s not tax deductible. The good news? Whole life does have some great tax benefits you can take advantage of. We’ll go over the reasons why it’s almost never tax-deductible below, along with some ways you *can* benefit when it comes to taxes.
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Request a Free QuoteWhy Whole Life Insurance Is Not Tax Deductible
Although we at WholesaleInsurance.net think everyone should have life insurance, the IRS doesn’t agree. The IRS considers life insurance a personal expense, and an optional one at that, which means you cannot deduct your policy’s payments. Plus, if you’re buying a policy, you’re using after-tax dollars, which also makes your payments an after-tax (not deductible) expense.
So if you buy a whole life insurance policy to protect your loved ones, you’re definitely doing the right thing – but you can’t deduct your monthly payments on your tax return.
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Request a Free QuoteThe Exceptions: When Whole Life Insurance Might Be Tax Deductible
There are a couple of exceptions, but they’re pretty rare. These are four instances when it may be possible to deduct the cost of whole life insurance:
- If you are an employer who pays the premiums for an employee’s policy. As a business owner, you are allowed an exemption on $50,000 of life insurance coverage per employee. If you offer more than that, you can deduct the premiums you pay on that employee’s behalf for the additional coverage. This is considered a business expense as long as the employee’s loved ones (and not you or your company) are the beneficiaries. If you or the company would receive even part of the death benefit, this no longer qualifies as a deductible business expense. Read more about this situation here on the IRS page here.
- If you are an employer who bought a policy for a key employee. If you have an executive or other VIP employee, you might choose to buy them a life insurance policy as a special perk or benefit. This is unlike a group benefit situation – this is a one-off purchase just for a specific employee. If the beneficiaries are the employees’ loved ones, the business can write off the premium payments. The employee must then declare the premium payments made on their behalf as income. However, if the business itself is the beneficiary, it is no longer a tax-deductible expense.
- If you selected a charity as your beneficiary. Some of our clients use a life insurance policy as a way to donate to their favorite charity. By naming the charity as your beneficiary, they can file the claim and get the death benefit when you pass away. If you do this, you can then deduct the cost of your payments because it’s the equivalent of a charitable donation.
- If you bought whole life insurance as part of an alimony agreement before January 1, 2019. If a judge ordered you to buy life insurance prior to that date, as part of your alimony agreement, you may be able to deduct those premiums. The policy must have been purchased after the judge’s order but before January 1, 2019.
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Request a Free QuoteThe Good News: Other Tax Advantages of Whole Life Insurance
Okay, so you can’t add your whole life insurance premiums to the list of things you deduct or itemize on your taxes. But that doesn’t mean you aren’t still benefitting. Here are the two main ways permanent life insurance gives you other tax benefits:
- Tax-free death benefit for your loved ones. In almost all cases, your beneficiary(ies) get the death benefit 100% income-tax-free. The only exceptions are if you structured your policy as a MEC (modified endowment contract) to use your policy as a place to sock away extra savings. People who do this are usually high-net-worth clients who plan to overfund their life insurance policy by hundreds of thousands of dollars. If that’s not you, you can be confident that your loved ones won’t have to pay a dime of income tax when they receive the cash death benefit from the insurer.
- Tax-deferred growth on cash value. A portion of every payment you make goes into your policy’s cash value account. Your insurer adds to this by paying interest on that account (a low flat rate set when you buy your whole life policy). That money grows tax-deferred, meaning it takes advantage of compound interest to grow without being taxed. Later in life, you can withdraw or borrow against your policy’s cash value and use that money for whatever you want. There is no income tax unless you pull out more than you’re paid into your policy. For example, if you’ve had your policy for 20 years and you’ve paid $200 every month, you’ve paid a total of $48,000 into that policy. You could withdraw up to that amount from your policy’s cash value without owing any income tax. If you withdrew $50,000, for example, you would owe income tax on just $2,000.
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Request a Free QuoteThe Best Reason to Buy Life Insurance – And It Has Nothing to Do with Taxes
We tell all our clients the best reason to buy whole life insurance is to protect loved ones who depend on your income. If you have people who depend on your paycheck for shelter, food, school supplies, or anything like that, you need life insurance. Even if there were zero tax benefits, this would be the right thing to do. Because if something happened to you, and your loved ones were suddenly without your income, what would they do?
When they collect your life insurance death benefit, you control what happens:
- Your loved ones have time to grieve without worrying about financial problems. This is the most important benefit of life insurance. It’s a final gift from you to your loved ones.
- Your family can stay in their current house or apartment. You probably don’t want them to have to worry about moving during the grieving process. You can leave enough for your spouse or partner to pay off the mortgage, or if that’s not affordable, enough to give them a window of time for the grieving process.
- Your kids won’t have to change schools. If your family has to move without your income, your kids might have to change schools. Or if you currently pay for private school, what money would they have for tuition without life insurance? That cash death benefit can keep your kids on track for success with stability and consistency in their schooling.
- Your spouse won’t have to get or change jobs. Depending on how much of a death benefit you left behind, you’ve given them time to settle affairs and help your kids through the process before needing to enter or re-enter the workplace. When we talk to clients, we ask them to estimate how many years of income they want to replace for their loved ones. Sometimes, they want to replace everything through retirement so their beloved spouse can stay with the kids as long as it’s needed. Other times, when budgets are tight, a client wants to replace 1-5 years of income to really give their family time to decide what’s next together. Either way, that money is a gift from you to them, to support them in achieving their dreams for the future.
- You can leave money for the kids to go to college. If you dream of sending your kids to college, life insurance can make that a reality if you’re not there to do it yourself.
➡️ See how affordable it can be to protect your loved ones with whole life insurance! Call us at 800-823-4852 or click the button below to request a free quote!
Request a Free QuoteThis content is presented for informational purposes only. Please check with your tax and financial professional for advice on your unique situation and potential tax liability.