Is Permanent Life Insurance Tax Deductible? (2024)

FAQs

Is Permanent Life Insurance Tax Deductible? ›

Life insurance proceeds paid in a lump sum are generally received by the beneficiary tax-free. This includes term, whole, and universal life insurance. However, if the payout is set up to be paid in multiple payments the payments can be taxable.

Life insurance proceeds paid in a lump sum are generally received by the beneficiary tax-free. This includes term, whole, and universal life insurance. However, if the payout is set up to be paid in multiple payments the payments can be taxable.

The IRS considers life insurance a personal expense and ineligible for tax deductions. Employers paying employees' life insurance premiums can deduct those payments, with some restrictions.

Similar to retirement accounts, such as 401(k) plans and IRAs, the accumulation of cash value in a whole life insurance policy is tax-deferred. Even though this money qualifies as income, the IRS does not require a policyholder to pay taxes on it until they cash out the policy.

For starters, the death benefit from a whole life insurance policy is generally tax-free. But a whole life policy also features a cash value component that's guaranteed to grow in a tax-advantaged way – it will never decline in value. As long as you leave the gain in your policy, you won't owe taxes on it.

Some life insurance is considered an asset, and a liquid asset at that. As explained below, there are two primary categories of life insurance, permanent and term. Generally, permanent life coverage is an asset, while term life coverage is not.

By purchasing life insurance, your clients can protect their families and potentially build policy cash values. At retirement, they can take tax-free loans or withdrawals from the cash value to supplement their retirement income, thus helping to minimize their taxes.

You should get permanent life insurance if you want to ensure life insurance coverage for the rest of your life rather than for a specific period of time. For instance, a permanent life policy makes sense if you want to leave behind an inheritance or have dependents who will require support no matter their age.

Withdrawal: In many situations, you can take a cash withdrawal from your permanent life policy, and that money is often not subject to income taxes as long as it's not more than the amount you've paid into the policy.

Are funeral expenses tax deductible? ›

Individual taxpayers cannot deduct funeral expenses on their tax return. While the IRS allows deductions for medical expenses, funeral costs are not included. Qualified medical expenses must be used to prevent or treat a medical illness or condition.

“In the vast majority of cases, life insurance premiums for individuals are not tax-deductible,” says R.J. Weiss, a Certified Financial Planner and founder of The Ways to Wealth. Tip: The IRS views life insurance as a personal expense, like many of the things we buy every day, and those are not deductible.

Should the insured die, the entire death benefit is income-tax free to the beneficiary. Tax-Deferred Earnings. You do not pay taxes on gains in the policy. Tax is deferred until you decide to surrender the policy, the policy has lapsed, or when certain distributions occur.

Both term and permanent life insurance policies provide a death benefit, which is generally paid to the beneficiary free of federal income tax and offers a tax-efficient way to make sure your family has the resources to help: Maintain their standard of living.

Whole life insurance is a type of plan that lasts for the rest of your life, assuming you continue to pay your premiums. It has a death benefit and secure cash value account, which grows tax-free.

Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received. See Topic 403 for more information about interest.

Generally, beneficiaries do not pay income tax on money or property that they inherit, but there are exceptions for retirement accounts, life insurance proceeds, and savings bond interest. Money inherited from a 401(k), 403(b), or IRA is taxable if that money was tax deductible when it was contributed.

Cashing out your policy

You're able to withdraw up to the amount of the total premiums you've paid into the policy without paying taxes. But if you withdraw on any gains, such as dividends, you can expect them to be taxed as ordinary income.

Using an Ownership Transfer to Avoid Taxation

If you want your life insurance proceeds to avoid federal taxation, you'll need to transfer ownership of your policy to another person or entity.

There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and is subject to social security and Medicare taxes.