Life insurance is a contract you purchase to protect your loved ones in the event of your death. It provides money for them to use for any purpose. Life insurance premiums pay for the death benefit of your life insurance policy while you're alive. When paying premiums, you cannot write off the premium amount on your taxes except when the purchase of the policy is part of a business life insurance plan.
Significance
The IRS does not allow you to write off personal expenses on your taxes except in certain limited exceptions pertaining to business activities. Life insurance premiums are considered a personal expense. Because of this, most premiums are paid on a nondeductible basis. The money used to pay premiums must have already been taxed at ordinary income tax rates.
Benefit
While you aren't able to write off premium payments, you do get other tax benefits. In particular, the death benefit is tax free. You are also able to access any cash value, if available, from the policy on a tax-free basis as long as the policy remains in force.
Disadvantage
Because you can't write off premium payments, your gross income remains unaffected by premium payments. If you are using the life insurance policy as an investment (i.e. if it builds cash value), then you won't get the same benefits that you would get from a traditional IRA or other retirement account which allows tax-deductible contributions.
Exceptions
There are exceptions to the nondeductible rule, such as when you own a business. Businesses that buy a life insurance policy and name another person as a beneficiary may write off the policy premiums as a business expense. Also, if a business purchases insurance for an employee while giving up ownership of the policy, it may deduct the premiums it pays.
Also, group life insurance premiums are deductible up to certain limited amounts. Premiums that are used to pay up to $50,000 in death benefits through an employer group life insurance plan are paid on a pretax basis. Premium payments are made prior to taxes being deducted from your paycheck.
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