Tax deductions are a reduction of taxable income through the expenses you have, every tax-deductible expense (personal expenses typically do not qualify) will reduce the taxable income by a certain amount, these expenses result in an increased tax return.
As far as the IRS (Internal Revenue Service) is concerned, standard life insurance plans premium payments are like any other personal expense, such as products or services, therefore, premiums are not tax-deductible.
Why is This?
Because life insurance policies already have pre-established tax considerations, for example, after the death of the insured person, income tax will typically not be applied on the amount of money the beneficiary receives, ultimately, the tax benefits are felt once the insured person passes away.
Business Life Insurance
Life insurance intended to cover individuals in the event of death is not tax-deductible even if premiums are paid from a business account.
Life insurance only becomes tax-deductible when it’s a business expense where the company itself is not the beneficiary of the policy.
For any kind of business insurance where the company is the direct beneficiary, premiums are not tax-deductible.
Permanent Life Insurance
Permanent life insurance policies can also have a cash accumulation component aside from the death benefit coverage.
Even though premiums are still not tax-deductible, these types of insurance bring another benefit to the table.
Cash value in a life insurance policy behaves like an investment, it grows over time, once it does, it can be used to pay for a house, college, insurance premium payments or collateral on a loan.
If you surrender your policy, the cash value will be tax absent up to your total premium payments.
How Does Cash Value Works?
Each time a premium payment is made, the money is split into three categories:
Cash Value – your account within the policy.
Insurance Cost – the cost of maintaining the death benefit.
Fees – Operation fees.
The cash value is separated from the death benefit, therefore, in the event of death, the beneficiaries will not receive it.