Can I Claim Life Insurance as a Business Expense?

When you're getting insurance for self-employment or run a small business, you might be wondering: is life insurance tax deductible? After all, the company likely relies on your wellbeing to succeed.

In a similar vein, health insurance premiums can typically be used as a business expense deduction. But unfortunately, there are only a few narrow situations where life insurance is tax-deductible for self-employed individuals. 

Find out how business life insurance works and how you can deduct life insurance premiums as a business expense.

Are life insurance premiums tax deductible as a business expense?

In most cases, life insurance for business owners is not tax deductible. Even if you’re self-employed, you cannot subtract your premium payments from your total income each year. 

As a business owner, however, you can offer life insurance policy coverage as an employee benefit. In this instance, the premium payments could be tax-deductible depending on your business classification status. 

If you have a C corporation, there is no such thing as a life insurance business expense as the IRS prohibits taking any type of deduction on life insurance premiums. So is life insurance tax deductible for other types of businesses? Keep reading to find out.

Can you deduct life insurance premiums as a business expense for S-Corps & LLCs?

The short answer is: yes, it’s possible to utilize a life insurance business expense as an S corporation or LLC. However, there are some stipulations in order to take advantage of a life insurance tax deductible business expense. 

First, in order to be eligible, the company must offer a life insurance policy as an employee benefit via a group plan. If the plan is only available to executives, then the premiums must be reported as wages. And anytime the coverage reaches $50,000 or more, that amount must also be listed as wages on the employee’s W-2. 

Another restriction is that you can’t deduct life insurance as a business expense if you are the beneficiary of the employee’s policy. So, for instance, a married couple running an S-corp together couldn’t deduct their life insurance premiums if they list each other as their policy beneficiaries. 

Note: At this time, Ethos does not offer group life insurance plans. This information is shared for those balancing the type of individual policies that Ethos offers versus group plans offered through an employer.

Are life insurance proceeds taxable?

While you generally can’t deduct life insurance premiums as a business expense, there is a major tax advantage for the beneficiary when a policy actually pays out upon the policy holder’s death. However, that’s because the proceeds are typically not included in the individual’s gross income, meaning they don’t have to pay any income tax.

This differs from an inheritance, which may be subject to estate taxes, depending on the amount. This is one reason why life insurance can be an important consideration for people who want to transfer wealth to loved ones. 

So even if life insurance cannot be a part of your short-term tax strategy for writing off business expenses, it can be an attractive long-term tax solution to pass wealth onto your heirs without diluting their proceeds with hefty taxes.

What type of business insurance is tax-deductible?

So can you deduct life insurance premiums as a business expense? In most cases, no, but there may be other types of business insurance that might provide some tax relief. Here are some insurance options for your company that can also provide a tax deduction.

• Liability insurance. Both general and professional liability insurance can cover professional lawsuits in a variety of situations, and it can be deducted as a business expense.
• Business interruption insurance. Another tax deductible type of insurance, this policy can reimburse eligible losses if your business is shut down due to a covered event, such as a fire
• Commercial property insurance. Similar to homeowners or renters insurance, commercial property insurance covers lost or damaged business property.

If any of these insurance policies make sense for your business structure, then you can deduct your premiums as an eligible expense. That boosts your protection while also lowering your overall tax liability.

List of deductible business expenses

Though you can’t rely on a life insurance tax deductible business expense, there are lots of other things you can deduct as a sole proprietor or small business owner. Some common tax deductions include: 

• Computer equipment and software
• Work-related travel, meals, and mileage
• Phone and internet
• Home office expenses
• Legal and professional expenses
• Employee salaries
• Employee benefits
• Courses, webinars, and other education
• Contributions to tax-deferred retirement accounts (like a traditional IRA or 401(k))

Working with a seasoned tax professional can help you maximize your tax savings and keep track of your business expenses. All of those deductions can really help lower your taxes so you can keep more of your hard-earned income.

Bottom Line

Paying your life insurance premium each month probably won’t lower your tax bill, but it will help provide you with a solid level of financial security. This is especially important when you’re building your own business. There’s definitely risk involved, especially if you have any type of debt or inventory associated with your company. A comprehensive life insurance policy helps to ensure your family or partner can cover those expenses and still feel financially secure should you pass away.

Try using the Ethos needs calculator to determine what size policy makes the most sense for you. Then you’re ready to get a quote for your online life insurance policy.

The information and content provided herein is for informational purposes only, and it is not to be considered legal, tax, investment, or financial advice, recommendation, or endorsement. You should consult with an attorney or other professional to determine what may be best for your individual needs.

FAQs

What are the tax benefits of life insurance? Tax benefits of life insurance in the USA typically include potential tax-deferred growth of cash value and tax-free death benefits for beneficiaries. Additionally, premiums paid for certain types of policies may be tax-deductible under specific circumstances.

Are receipts from life insurance policies taxable? Generally, receipts from life insurance policies are not taxable as income for beneficiaries. This applies to death benefits received by beneficiaries upon the policyholder's passing.

What is the tax limit for life insurance? There isn't a specific tax limit for life insurance in the USA. However, certain policies may have contribution limits or guidelines for tax advantages, such as maximum premium amounts or limits on cash value accumulation.

Which life insurance is best for tax exemption? The best life insurance for tax exemption depends on individual financial circumstances and goals. Some permanent life insurance policies offer potential tax advantages, such as tax-deferred growth of cash value and tax-free death benefits.

How do you declare insurance in income tax? When filing income tax in the USA, life insurance policies typically don't need to be declared as income. However, if you receive certain benefits from a life insurance policy, such as dividends or withdrawals, they may be subject to taxation under specific circumstances. It's advisable to consult with a tax professional for accurate guidance.