Life Insurance Premiums Deductible As A Business Expense?

Life Insurance Premiums Deductible As A Business Expense?

Life Insurance Premiums Deductible As A Business Expense?

If you are a business owner and you are planning to apply for deductible life insurance, there are important things that you need to know. Although applying for one is very tempting for business owners because of the tax-deduction on premiums, there are complications to consider. 

What are some considerations for businesses to make their life insurance premiums deductible and declare it as business expenses?

There are certain criteria that businesses should meet in order to deduct premiums as a business expense. Take a look at the following qualifications:

  • To make the life insurance premiums deductible a business should be an LLC or S Corporation
  • It should be a group policy and members must be an employee or an officer of the company. 
  • If it is under group life insurance, then the company has no right to name the business as the beneficiary.
  • Also, it is important to bear in mind that companies can only deduct $50,000 for premium payment and beyond that is not permitted. 

In the case of shareholders who have a life insurance policy through the name of the company and the business is the beneficiary, the deductible expense is not applicable. Also, it makes the insurance benefit not exempted from tax. In the case of freelancers as well as self-employed individuals, they are not eligible for this type of insurance. They can only apply for the traditional life insurance policy. 

What about for key person life insurance, is it eligible to deduct as a business expense?

The key person can be the owner of the business or an employee with special skills that are vital for the overall business operations. This type of life insurance serves as a safeguard for the business in case of the death of an important member of the company. If the company is the beneficiary of the policy, then the premium that you can get from the key person policy is not tax exempted as a company expense.

However, there is an exemption to the rule. If in case that the premium is part of the taxable income of the employee, then the monthly premium from this policy is eligible for the deductible as a company expense. It is imperative to take note that the employee must be the beneficiary to qualify for the deduction. 

What about buy-sell agreements, is it eligible for deduction as a business expense?

This agreement is very similar to key person life insurance. This is vital especially for co-owners to secure their company in case the owner of the company suddenly leaves the company or dies. The good thing about this agreement is the fact that it is financed by the life insurance policy. The company can choose to acquire individual insurance for every co-owner or purchase as a corporation. This is a good option because if one co-owner dies, then others will get their benefit. 

What are the possible consequences of  life insurance premiums being deductible?

Many businesses are not aware of the consequences that it can incur especially to their employees. Applying for one as business expense makes the premium taxable. This is the truth especially for huge group policy that is more than $50,000 allowed for LLC and S Corporations. As a result, all employees will suffer from tax to their benefits. 

Business owners should be very careful and understand all possible consequences of deductible life insurance. This is to protect the interest of your employees especially when it is time for them to make a claim. 

Consult with a Professional with any eligibility questions

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