Life Insurance Tax Benefits: IRS Deduction Rules

Life insurance tax benefits explained. IRS rules for premium deductions, death benefits, and business insurance.

The IRS provides specific rules for life insurance taxation that affect personal and business financial planning. **Personal Life Insurance Tax Rules** Premium payments: - Not tax-deductible for personal policies - Paid with after-tax dollars - No annual income reporting required Death benefits: - Generally tax-free to beneficiaries - No income tax on proceeds - May be subject to estate taxes **Business Life Insurance Deductions** Key person insurance: - Premiums not deductible if business is beneficiary - Death benefits tax-free to business - Must demonstrate insurable interest Employee group life insurance: - Premiums deductible as business expense - First $50,000 of coverage tax-free to employees - Excess coverage taxable to employees **Modified Endowment Contracts (MECs)** IRS rules for cash value policies: - Withdrawals taxed as income first - 10% penalty on early withdrawals - Loan interest may not be deductible **Tax-Free Exchange Rules (Section 1035)** Allows tax-free exchanges between: - Life insurance policies - Annuity contracts - Qualified long-term care policies Consult tax professionals for complex insurance tax situations and estate planning strategies.