Are Premiums Paid on Life Insurance Tax Deductible?
Are premiums paid on life insurance tax deductible? The answer depends on your circumstances. If you pay a single premium, for example, the interest on the policy is not tax deductible. If you pay a single premium, however, the difference between the premium and cash value of the policy is tax deductible. Similarly, if you pay $100 a month for 20 years, you will end up paying $24,000 in taxes and cash value of $30,000 will be taxed.
Interest paid or accrued on life insurance policies is not tax deductible
Unless the policy itself qualifies for a deduction, interest paid or accrued on life insurance policies cannot be deducted from income. This is due to the fact that a life insurance policy is not a taxable asset. However, if you are obligated to pay back the loan at some point in the future, the interest may be deductible if the amount is below its fair market value.
There are several exceptions to the general rule regarding deductible interest. Interest paid or accrued on a life insurance policy is not tax deductible if the amount exceeds the total premiums paid. A loan against a life insurance policy is a good example. You can draw on it to pay off the loan. The insurance company will use the loan proceeds to repay the loan. The rest of the proceeds will go to the beneficiary of the policy.
Transferring ownership of a life insurance policy to charity is tax deductible
You may have heard that transferring ownership of a life insurance policy to charity can reduce your taxes. But transferring a life insurance policy to charity is not as simple as donating cash. First, you must get an appraisal of the policy. Non-cash gifts of more than $5,000 require an appraisal, and the amount of the gift is not limited to the fair market value of the policy. Generally, you can deduct the lesser of the policy’s adjusted “cost basis” or its fair market value. The adjusted cost basis is the amount of premiums the donor paid prior to transferring it to the charity, less any withdrawals made from the policy. You must request this value from your insurance company before making a donation. It is usually lower than the fair market value, but is still close enough to cash value.
Moreover, if you’re donating an existing life insurance policy to charity, the basis is not reduced by “mortality charges.” Unlike cash, life insurance is treated as an “extended” asset, so you should keep this in mind. This method is particularly helpful if the beneficiary of the policy is in a terminal illness. If the policy pays dividends, the current year dividends can be directed to the charity.
Buying life insurance is not a business expense
It’s common to think that buying life insurance for shareholders is a legitimate business expense, but that’s not always the case. Life insurance premiums for deceased shareholders of a corporation are not deductible as ordinary business expenses. Instead, the corporation treats the premiums as a capital expenditure, or an acquisition of a capital asset. The corporate world is notoriously complicated. But there is hope for those who believe in the principle behind life insurance as a legitimate business expense.