When it comes to deducting life insurance premiums, being able to remove the cost of these premiums from your list of financial obligations can be a highly appealing opportunity. While the general rule is that individuals and businesses are not able to deduct life insurance premiums, there remain several important exceptions to this rule that could make all the difference.
As these precise terms and conditions for deducting tax from life insurance premiums can seem slightly complicated, BuyHealthInsurance.com is always pleased to provide advice on your health coverage situation. We’ve outlined the situations in which life insurance premiums can be tax deductible, as a preliminary guide to this field of insurance legislation:
Group term life insurance
In the case where a company provides term life insurance for its employees, the employer is allowed to claim the premiums against their business income. The expenses must be reasonable, and the employee must include the premium payments as a part of their income.
Special circumstances also apply to individuals or corporations donating a life insurance policy to a charitable organization, or when an individual names a charity as a beneficiary (in which case the charity will receive the death benefit when the individual dies). These circumstances are fairly restrictive in how the person interacts with the life insurance policy, with the terms of the legislation specifying that the individual owns a life insurance policy on their life, that they continue to pay the premiums, and that they include the policy gain, if any, in income. They are also obliged to claim a tax credit for all life insurance policy premiums that are paid after the donation has been made. Corporations donating life insurance premiums to charities are also controlled by the same restrictions. In both cases, the insured person’s death obliges that the death benefit is paid tax-free to the charity, and not treated as a donation.
Registered life insurance policies
Although registered life insurance policies are rarely found in today’s insurance market, there are some that might still be in force. As these plans constitute that the policy’s cash value is a registered asset instead of the mortality value, for them to be tax deductible the policy-owner may not deduct the part of the premium that is attributable to the mortality risk. They may, however, deduct the remaining amount of the premium, upon the advice of the life insurance company providing the cover.
Policies used as collateral security for a loan
As it is sometimes necessary to obtain a life insurance plan when borrowing money for the means of business operations, the cost of the premiums is deductible in certain cases. To qualify for this situation, the loan must come from a financial institution in the business of lending money, and they must be assigned the life insurance policy concerned as security for the business loan. After having assigned the policy to the financial institution, the policy-owner may deduct the lesser of the premiums that they continue to pay and the net cost of pure insurance. Any interest payable on the loan must be deductible for income tax.
While these regulations might seem somewhat complicated, it is well worth taking the effort to determine whether or not you qualify for tax deduction!