Are life insurance premiums tax deductible for self employed

When you're getting insurance for self-employment or run a small business, you might wonder if life insurance is a tax-deductible business expense. After all, the company likely relies on your wellbeing to succeed.

In a similar vein, health insurance premiums can typically be used as a business expense deduction. But unfortunately, there are only a few narrow situations where life insurance is tax-deductible for self-employed individuals. 

Find out how business life insurance works and how it’s treated when it comes to tax deductions.

Is life insurance a deductible business expense?

In most cases, life insurance for business owners is not tax deductible. Even if you’re self-employed, you cannot subtract your premium payments from your total income each year. 

As a business owner, however, you can offer life insurance policy coverage as an employee benefit. In this instance, the premium payments could be tax-deductible, but it depends on your business classification status. Any C corporation is automatically prohibited by the IRS from taking any type of deduction on life insurance premiums.

Life Insurance as a Business Expense for S-Corps & LLCs

S corporations and LLCs, however, have a few scenarios in which a tax write-off is possible. In order to be eligible, the company must offer a life insurance policy as an employee benefit via a group plan. If the plan is only available to executives, then the premiums must be reported as wages. And anytime the coverage reaches $50,000 or more, that amount must also be listed as wages on the employee’s W-2. 

Another restriction is that you can’t deduct life insurance as a business expense if you are the beneficiary of the employee’s policy. So, for instance, a married couple running an S-corp together couldn’t deduct their life insurance premiums if they list each other as their policy beneficiaries. 

At this time, Ethos does not offer group life insurance plans. This information is shared for those balancing the type of individual policies that Ethos offers versus group plans offered through an employer.

Are life insurance proceeds taxable?

While you can’t deduct life insurance premiums as a business expense, there is a major tax advantage for the beneficiary when a policy actually pays out upon the policy holder’s death. The proceeds are typically not included in the individual’s gross income, meaning they don’t have to pay any income tax. This differs from an inheritance, which may be subject to estate taxes, depending on the amount. 

Although life insurance may not be a part of your short-term tax strategy for writing off business expenses, it can be an attractive long-term tax solution to pass wealth onto your heirs without diluting the proceeds with hefty taxes.

What type of business insurance is tax-deductible?

Life insurance as a deductible may not work for everyone, but there may be other types of insurance. Here are some options that could help protect your company while also serving as a tax deduction.

• Liability insurance. Both general and professional liability insurance can cover professional lawsuits in a variety of situations.
• Business interruption insurance. This policy can reimburse eligible losses if your business is shut down due to a covered event, such as a fire.
• Commercial property insurance. Similar to homeowners or renters insurance, commercial property insurance covers lost or damaged business property.

If any of these insurance policies make sense for your business structure, then you can deduct your premiums as an eligible expense. That boosts your protection while also lowering your overall tax bill.

List of deductible business expenses

What other expenses can you deduct as a sole proprietor or small business owner? Here are some of the most common tax deductions. 

• Computer equipment and software
• Work-related travel, meals, and mileage
• Phone and internet
• Legal and professional expenses
• Employee salaries
• Employee benefits
• Courses, webinars, and other education
• Contributions to tax-deferred retirement accounts (like a traditional IRA or 401(k))

You may want to consider working with a seasoned professional who can help you maximize your tax savings. Also remember that adding up all of those deductions can really help lower your taxes. But at the same time, you’re also lowering your gross income. If you want to buy a house or apply for other types of financing, you may be limited in how much you can borrow if you lower your taxable income too much.

Bottom Line

Paying your life insurance premium each month probably won’t lower your tax bill, but it will provide you with a solid level of financial security. This is especially important when you’re building your own business. There’s definitely risk involved, especially if you have any type of debt or inventory associated with your company. A comprehensive life insurance policy ensures your family or partner can cover those expenses and still feel financially secure should you pass away. 

Try using the Ethos needs calculator to determine what size policy makes the most sense for you.

Then you’re ready to get a quote for your online life insurance policy.

The information and content provided herein is for informational purposes only, and it is not to be considered legal, tax, investment, or financial advice, recommendation, or endorsement. You should consult with an attorney or other professional to determine what may be best for your individual needs.