Can Contributions to Whole Life Insurance Policies Be Written Off on Taxes?
Whole life insurance is a form of permanent life insurance. Permanent life insurance remains in force for your whole life if all premiums are paid on time. Sometimes, life insurance premiums for whole life can be written off on your taxes. Make sure you understand the rules for this before attempting this as a tax strategy.
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Process
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When life insurance is purchased for business purposes, the premiums that the business pays are considered a business expense. For this expense to be tax deductible, the policy should be owned by the employee and not the company directly.
Significance
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The significance of writing off policy premiums is that these premiums effect the gross income of the business. The tax write-off is a business expense, like any other business expense. Additionally, the premiums are paid as a benefit to executive-level employees, which gives them an incentive to stay with the company. A private contract is signed between the employee and the employer so that the employer may limit access to the policy's cash values. This prevents the employer from making premium payments and the employee from leaving the company and taking the policy with him without fulfilling a specified number of service years with the company.
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Benefits
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The benefit of writing off whole life premiums on a business's taxes is that the business pays less in taxes. The money that would have gone to paying taxes goes towards strengthening employee loyalty, which in turn may translate into greater profits for the company.
Misconceptions
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A common misconception is that a business that owns a life insurance policy may deduct the premiums it pays. This is generally disallowed by the IRS under the rules for corporate-owned life insurance, also called COLI. If the life insurance is owned by the employer and insures the life of an employee, and the company is the beneficiary, then premiums are not tax deductible.
Considerations
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When paying the premiums on a life insurance policy for your employee, consider paying the taxes on the money they receive. When you pay premiums on a life insurance policy, the premiums are treated as income to the employee. You may pay a bonus to the employee to cover the taxes due on the premiums. But this bonus constitutes income to the employee also, so you may want to consider paying an additional bonus, called a double bonus, to pay for the taxes on the first bonus as well as the taxes due on the second bonus.
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