Can You Deduct Your Term Life Insurance Payments From Your Federal Taxes?

Term life insurance is the most basic form of life insurance. Term insurance provides death benefits in exchange for a premium payment. Term insurance is sometimes closely related to a benefits package or retirement plan. For this reason, you might think that the policy premiums are tax deductible. However, there are rules for making a deduction of term life premiums.

Process

The process for deducting your term life insurance premiums is not done by you directly. Instead, money is taken from your paycheck pretax to pay for group term life insurance. If you buy life insurance from your employer, you may pay for up to $50,000 worth of coverage without paying tax on the premium payments. However, you may not deduct premiums on your term life insurance policy for other reasons.

Significance

The significance of paying for term life insurance pretax is that you are paying for life insurance and lowering your taxable income at the same time. Pretax premium payments mean that less money goes toward paying life insurance premiums than would otherwise be the case.

Benefit

The benefit of paying life insurance with pretax dollars is that you are not paying as much in taxes for every year that you pay those premiums. Instead you get to keep more of your income and you also receive the benefit of life insurance. You may also be able to convert your term policy to a permanent policy when you leave your job. Your life insurance will have been paid for with untaxed dollars and still give your beneficiaries a tax-free death benefit.

Disadvantage

The disadvantage to paying for term life with pretax dollars is that you are only able to buy up to $50,000 worth of death benefit from your employer. Any life insurance over this amount must be paid for using after-tax dollars. Unless you run a business of your own, you are not able to deduct term life insurance premiums. If you do run a business of your own, you may be able to claim the premium payments as a business expense if the policy is owned by you, outside of the business, and is paid for by the company.

Considerations

If you are going to purchase life insurance over and above the $50,000 limit from your employer, you may want to consider a private policy. While the private term life insurance policy may be more expensive than a group term life policy, the policy will be yours, regardless of your status as an employee. Many employers offer the provision to convert your company policy to a private policy but many employers also do not offer this option. If you lose your job, you may want to have your own policy.

References

• "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
• "New York Guide To Life And Health Insurance Law"; Dearborn Career Development; 2004
• IRS.gov: Group-Term Life Insurance