Being self-employed allows you the freedom to set your own hours and choose your own job opportunities. But, it also comes with many expenses, including the cost of life insurance premiums. Even though many of the expenses you pay to operate your business are tax-deductible, most life insurance premiums are not.
Life Insurance Premiums for Yourself
In most cases, the premiums you pay for life insurance policies intended to provide for you and your family family in the event of your death are not tax-deductible, regardless of the account you pay them from, the size of the policy or the amount of the premiums. But, a life insurance policy as a means of protecting your business assets, you may be able to deduct the cost of your premiums on Schedule C of Form 1040.
Life Insurance Premiums for Employees
If you purchase life insurance policies for your employees or officers, you can usually count the premiums you pay as operational expenses. To claim a deduction for these costs, include the full amount of the premiums with the business expenses you list on Schedule C. If, after totaling all of your business expenses, you have a net operating loss, you may be able to carry the loss forward to reduce future business income.
What is deductible
The cost of life insurance premiums are deductible if the insurance is provided as a benefit for employees and if the business is not the beneficiary of the policy. The cost of the premiums paid by an employer for insurance on the life of an officer or employee is deductible ONLY if it can be shown that:
- The employer is not directly or indirectly a beneficiary under the policy.
- Premium payments are in the nature of additional compensation,
Total compensation, including premiums, is not unreasonable, and
Premiums on group term life insurance covering the lives of employees are deductible by the employer if the employer is not a direct or indirect beneficiary. The payment of such premiums generally represent income to the employee to the extent that the coverage provided exceeds $50,000
If you deduct the premiums, the proceeds of a claim on the policy are taxable only to the amount of the premiums paid. If you take no tax deduction for the premium expense, then proceeds of the claim are not taxable.
Something else to consider
Although you cannot typically deduct life insurance premiums for policies that protect your life, you may be able to deduct the cost of other insurance premiums you pay when you are self-employed. For example, if you don’t have access to an insurance policy from your spouse’s employer, you can usually deduct the cost of any health insurance premiums you pay for your family members and yourself.
You may also be able to deduct the cost of long-term care insurance.
I advise most self employed people to look into this potential tax deduction.
Premiums for “qualified” long-term care insurance policies (see explanation below) are tax deductible to the extent that they, along with other unreimbursed medical expenses (including Medicare premiums), exceed a certain percentage of the insured’s adjusted gross income.
These premiums — what the policyholder pays the insurance company to keep the policy in force — are deductible for the taxpayer, his or her spouse and other dependents as long as they exceed 10 percent. For taxpayers 65 and older, this threshold will be 7.5 percent through 2016. Those who are self-employed can take the amount of the premium as a deduction as long as they made a net profit; their medical expenses do not have to exceed a certain percentage of their income. What is deductible as a medical expense is spelled out in Internal Revenue Service Publication 502.