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It’s a common question, and the IRS rules around it can be surprisingly strict. In most cases, you can’t deduct premiums if your business is also the beneficiary of the policy. However, some deductions are allowed in certain situations, especially with employee coverage.
Understanding these distinctions is essential if you're trying to lower your taxable income while protecting your team or your key people. Knowing when premiums qualify, and when they don't, can save you from expensive tax mistakes while helping you make smarter financial decisions for your business.
At BetterWealth, we help entrepreneurs and business owners structure life insurance strategies that support their long-term goals without violating tax rules.
In this blog, we’ll break down:
Let’s clarify the rules so you can move forward with confidence.
You can deduct life insurance premiums as a business expense only in specific cases. The rules depend on who the policy covers and who benefits from it.
The IRS generally does not allow life insurance premiums to be deducted as business expenses. They consider these premiums a personal cost, not an operational business expense. However, there are exceptions when the policy is tied to business needs. One key exception is for policies on key employees or partners.
If your business has a policy on a partner or essential employee, the premiums paid by your business might be deductible as an operating expense. But, this applies only if the company does not benefit from the policy’s death benefit.
For most small business owners or self-employed individuals, premiums you pay for your own life insurance cannot be deducted. The IRS sees these premiums as personal, so they don’t reduce your taxable business income.
Not all life insurance premiums qualify as deductible expenses. To ensure compliance, specific rules must be followed:
By following these requirements, businesses can avoid costly mistakes and ensure deductions are valid under tax law.
When premiums are deductible, they reduce your business’s taxable income. This lowers the overall tax your company owes, improving cash flow. For example, premiums on group-term life insurance for employees can be treated as an ordinary business expense.
If your business is not eligible for deductions, life insurance premiums do not reduce your taxable income. Instead, you pay taxes on your full business earnings before accounting for these personal insurance costs.
Life insurance premiums often cannot be deducted as a business expense. This happens mainly when you or your business is both the owner and the beneficiary, or when specific rules for key person coverage are not met. Mistakes in paperwork and misunderstandings of IRS rules are common reasons premiums get disallowed.
You cannot deduct life insurance premiums if your business owns the policy and you, or someone closely related, are the beneficiary. For example, if you run an S-corp and name yourself or a family member as the beneficiary, IRS rules treat the premiums as personal expenses.
This means the business cannot write off those premiums. The IRS sees the benefit returning to you personally, so it does not qualify as a deductible business cost. If you want to deduct premiums, the policy’s beneficiary must not be the business owner or their relatives. This keeps the deduction within IRS guidelines.
When your business buys life insurance on key employees, you can deduct premiums only if specific rules are followed. The premiums can be deductible only if the key employee includes the premium amount as taxable income.
If the premium isn’t counted as income to the employee, then it’s not deductible by the business. This measure prevents businesses from claiming a deduction for benefits that do not have taxable consequences for employees. Also, key person policies cannot name the employee as the beneficiary.
The business is usually the beneficiary to protect itself from losses related to the employee's death.
Many businesses lose out on valid deductions—or face penalties—because of these common errors:
Avoiding these mistakes starts with careful record-keeping and a clear understanding of IRS rules for deductible premiums.
You usually can't deduct life insurance premiums as a business expense. However, there are specific cases where the IRS allows deductions. These mainly involve group policies for employees or specific employee benefit programs. Self-employed individuals face more limits but also have some options to consider.
If you provide group term life insurance to your employees, you may be able to deduct the premiums. The policy must cover a group of employees and offer a specified amount of coverage, often up to $50,000 per employee.
Key points:
Group term life insurance is the most common form of business-deductible life insurance. It helps you support your workforce while potentially lowering your taxable income.
Life insurance premiums paid under broader employee benefit programs might also be deductible. This includes benefits where the business doesn't directly benefit from the policy's death benefit.
To qualify:
These benefit programs often include life insurance alongside health or disability coverage. Deductions can encourage employee welfare without giving the business an unfair tax advantage.
As a self-employed person, you generally cannot deduct life insurance premiums as a business expense because the IRS views them as personal costs. However, exceptions exist:
You should carefully distinguish between personal and business expenses here. Consulting a tax professional may help you find legal ways to reduce your tax burden while maintaining proper coverage.
Key person life insurance protects your business if a vital employee passes away. The costs of this insurance and the benefits you receive have specific tax rules you should understand to plan effectively.
You cannot deduct key person life insurance premiums as a business expense.
The IRS classifies these premiums as a capital expense instead of a regular business cost. This means you must pay them with after-tax dollars. G premiums are not deductible if your company owns the policy and is the beneficiary.
This rule applies regardless of your business structure. However, if the policy is given to the employee or structured differently, there might be exceptions. Always track whether the policy is classified as corporate-owned life insurance (COLI), with specific reporting rules after 2006.
But in most cases, the premium cost won’t reduce your taxable income.
Those proceeds are usually tax-free when your business receives death benefits from a key person policy. This means the payout will not count as taxable income for your company.
These tax-free benefits can help cover lost revenue, find new talent, or pay debts after losing the insured key employee. It’s important to note that the tax-free status only applies if your business is the beneficiary.
If the policy ownership or beneficiary changes, the tax treatment may also change. Always review your policy details to ensure the death benefits remain tax-exempt.
When a C Corporation pays life insurance premiums, the tax treatment depends on who owns and benefits from the policy. Your ability to deduct these premiums relies on the ownership structure and the designated beneficiary. These rules determine whether premiums are deductible business expenses or not.
Certain IRS restrictions apply when a C Corporation owns a life insurance policy. Here are the key points:
Overall, while C Corporations lose the ability to deduct premiums, the tax-free benefits can still play a critical role in protecting the business.
You can deduct life insurance premiums if the policy is on a key employee or executive, but only if that individual is the beneficiary of the policy, not the corporation.
In cases where the employee or shareholder owns the policy and names their family or themselves as beneficiaries, the company can treat premium payments as taxable bonuses to the employee.
These bonuses are deductible for the corporation. This setup rewards key employees while maintaining proper tax treatment. You often see this under “executive bonus” plans, giving employees ownership and control over the policy while the corporation deducts the premium as a compensation expense.
When your business considers life insurance premiums as a deduction, how ownership and beneficiaries are structured plays a significant role. Different rules apply depending on whether you’re an S Corporation shareholder or part of a partnership. Understanding these nuances helps you avoid costly tax mistakes.
If your S Corporation pays life insurance premiums for a shareholder, the premiums are generally not deductible if the company is the beneficiary or owner of the policy. This means the corporation cannot write off the premiums unless the insurance is treated as a taxable employee benefit and included in the shareholder’s wages.
When premiums are part of compensation, they show up on your W-2 as taxable income. You can then deduct them personally only if they meet IRS rules. The key point: premiums paid on policies where the corporation benefits directly usually won’t create a deductible business expense.
In partnerships, if the partnership owns the life insurance and is the beneficiary, premiums are usually not deductible as a business expense. This rule prevents tax sheltering through personal life insurance inside the business.
Partners typically pay the premiums with after-tax dollars and receive death benefits tax-free. If the policy is for an individual partner’s benefit, premium payments are not deductible by the partnership but may affect each partner’s basis.
To understand what you can deduct in a partnership setup, focus on how the policy is owned and who benefits.
To claim life insurance premiums as a business expense, you must keep detailed records and follow IRS rules closely. Proper documentation shows your eligibility and helps avoid tax issues. You must also report premiums correctly based on who benefits from the policy.
You should keep clear records of all life insurance premiums your business pays.
Include payment dates, amounts, the policy beneficiary, and the insured's role in the industry. This is especially important if the policy covers a key employee or business partner. The IRS usually disallows the deduction if you list yourself or a family member as the beneficiary.
Accurate records prove compliance with these rules. Keep copies of insurance contracts and correspondence for at least seven years, as the IRS may request them during audits. Organizing your premium payments using software or a dedicated financial folder reduces errors and simplifies tax reporting.
The IRS allows deductions for life insurance premiums only if the insured is a key employee or business partner, and the business is not the beneficiary. When premiums are deductible, report them as operating expenses on your tax return.
You must disclose the identity of the insured and beneficiary on Form 1120 (corporate tax return) or Schedule C (for sole proprietors). If your business is the beneficiary, premiums are not deductible, but the death benefit may be tax-free.
Failure to follow IRS guidelines can result in penalties or disallowed deductions. To ensure compliance with current rules, confirm your filing method with a tax professional.
If you incorrectly deduct life insurance premiums as a business expense, you risk penalties, added taxes, and IRS audits. It’s essential to understand the consequences and learn how to follow IRS rules to avoid trouble.
Claiming life insurance premiums as a business expense when not allowed can lead to IRS penalties and interest on unpaid taxes. The IRS may disallow the deduction and charge you for back taxes.
If the premiums are for a policy that benefits you personally, the IRS sees this as a non-deductible personal expense. You might also face an audit, which is a detailed review of your tax returns. This can be time-consuming and costly.
In some cases, repeated mistakes or large improper deductions may trigger harsher penalties or draw the IRS’s attention to other parts of your business finances.
Life insurance deductions can get tricky, but following these steps will help you stay compliant and avoid penalties:
By following these steps, you can confidently manage life insurance deductions while staying aligned with IRS expectations.
When you can’t deduct life insurance premiums directly, other ways exist to structure benefits and insurance products that help manage costs and provide value. These choices can protect your business and offer advantages for your employees or yourself.
You can offer life insurance as part of an employee benefits package.
Your business's group life insurance premiums are often deductible, similar to health insurance costs. This setup helps your employees without putting the premium expenses outside of tax advantages. Make sure the life insurance is part of a broader benefits plan and not just a standalone policy with you or business owners as beneficiaries.
This ensures your company maximizes deductions and avoids IRS restrictions. You can include basic coverage or optional supplemental policies. These employee benefits are a better option if you want your business to benefit from tax deductions linked to life insurance.
If life insurance premiums don’t qualify for a deduction, explore insurance products that typically allow it. Health insurance, disability insurance, and specific key person insurance policies often have clear tax advantages.
Key person insurance premiums might be deductible if the policy covers a vital employee and the business is not the beneficiary. These policies protect the company financially if someone critical to operations passes away or leaves. Review these alternatives carefully with a financial advisor.
Using insurance types with deductible premiums can reduce your tax burden while providing important coverage and business protection.
Are you confused about what the IRS does and doesn’t allow when deducting life insurance premiums? You're not alone. These quick answers tackle questions many business owners ask once they start looking beyond the surface and want to avoid costly surprises.
Only in limited cases. The premiums might be deductible if your lender requires the policy and your business isn't the beneficiary. However, if the business benefits from the policy payout, the IRS treats the cost as non-deductible.
Usually not. When policies fund buy-sell agreements and the business is the beneficiary, premiums are treated as capital expenses, not deductible operating costs. However, the death benefits are generally tax-free to the surviving owner.
No, the IRS looks at substance over structure. If the policy benefits the same owner or related party, running it through a holding company won’t make premiums deductible. Ownership and beneficiary roles matter more than who writes the check.
Not typically. Independent contractors aren’t employees in the IRS’s eyes. That means premiums paid for their life insurance usually count as personal or contractor compensation—not a deductible business expense under standard employee benefit rules.
It depends on the structure. In a split-dollar setup, if your business pays premiums and gets repaid or benefits, they’re usually not deductible. However, if the premium is structured as employee compensation, the business may deduct it as a bonus.
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