Life insurance policies are paid using premiums. A premium is the total of all of the expenses plus the amount required for investment purposes so that the insurance company can meet its promises outlined in the contract. Insurance premiums are not normally tax deductible, except in rare circumstances.
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Personal Insurance
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Life insurance purchased for personal reasons is not allowed as a deduction. All premiums are paid with after-tax dollars. This money is considered a cost of doing business. Even if you itemize deductions on your tax return, you are not allowed a deduction for the policy's premiums.
Group Life Insurance
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Group life insurance is life insurance taken out by a business for the benefit of its employees. The IRS allows premiums to be paid on a pre-tax basis as long as the premiums are not used to support more that $50,000 of death benefit. Any death benefit amount in excess of this is paid for with after-tax, non-deductible dollars. Death benefits are income tax-free.
Key Person
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Key person life insurance is insurance taken out on the life of important executives of a corporation. The business buys the policy on the executive's life. If the executive dies, then the corporation uses this money to find, hire and train a new executive. In general, premiums paid on this policy are not tax deductible. Death benefits are income tax-free.
Executive Bonus
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Corporations may reward employees on an individual basis through a bonus program. If permanent life insurance is used, the employee receives a savings component with his life insurance. These bonus payments go toward the payment of life insurance premiums and are tax deductible to the corporation. The bonus is treated as income to the employee and subject to income tax. The employee does not deduct the bonus, but the death benefit is payable to his family and is income tax-free.
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