This question comes up a lot. The answer is “no,” with only one exception. But, since people always reply with, “Are you sure life insurance isn’t tax deductible???”, let’s break it down to cover all the different unique circumstances.
Life insurance is not tax-deductible if purchased to protect the family, protect the estate, pay-off the mortgage, provide money to replace a “key-person” or “Key-employee” in a company, or to fund a “Buy-Sell Agreement” between partners or shareholders. To repeat, the answer is no, no, no, sorry no and wish-it-were-true-but-no.
Life insurance premiums are tax-deductible for Whole Life or Universal Life policies inside a “Qualified Retirement Plan.” This means that if you have a Defined Benefit or a Defined Contribution (Profit-Sharing or 401k) retirement plan, the premium for the life insurance policy is tax deductible. But it isn’t quite that simple. Let’s clarify:
For Whole Life policies inside of a Qualified Retirement Plan, there is “cash value” and there is a “death benefit.” The cash value is like a savings account, and it is included in the equity of the retirement account. For example: a person has a retirement account that has both Whole Life insurance and mutual funds. The cash value of the life insurance is $10,000 and the equity in the mutual fund is $30,000. The participant has a total of $40,000 in their retirement account.
The difference between the Whole Life policy death benefit and the cash value is the amount of “net” insurance. For example, if the death benefit is $250,000, but the cash value is $10,000, the net death benefit is $240,000. The cost for this, which is similar to a term insurance cost, is 1099’d to the participant; they have to pay tax on it. But, the premium paid for the life insurance is tax-deductible, just like any other pension contribution.