Can You Deduct Life Insurance Premiums as a Business Expense?

Life insurance premiums a business pays are generally not deductible as a business expense. The rule against a business life insurance premium deduction kicks in whenever the company is directly or indirectly a beneficiary of the policy, which covers most situations where a business insures an owner, officer, or key employee.¹ The main exception is group term life insurance provided to employees, where premiums qualify as deductible compensation. A few other narrow arrangements can produce a deduction, but each carries strict conditions.

Why Most Business-Paid Premiums Are Not Deductible

IRC Section 264(a)(1) sets the baseline: no deduction is allowed for premiums on any life insurance policy when the taxpayer is directly or indirectly a beneficiary.¹ The reasoning is symmetrical. Death benefits from a life insurance contract are generally excluded from the recipient’s gross income.² Because the business will collect a tax-free payout when the insured dies, the IRS does not also let it deduct the premiums that bought the coverage.

The most common casualty of this rule is key person insurance. A business insures a critical executive or producer, names itself as beneficiary, and plans to use the eventual payout to cushion the loss of that person. Because the business is the direct beneficiary, the premiums are not deductible.³

The disqualification also reaches less obvious situations. If a lender requires a policy to be assigned as collateral for a business loan, the company is treated as an indirect beneficiary: the death benefit would repay the debt, which protects the balance sheet. That indirect benefit triggers the Section 264 prohibition, and the premiums are not deductible.³ Section 264 also bars any interest deduction on borrowings used to purchase or carry a life insurance policy.¹

One useful clarification lives inside the regulation. Premiums are not disallowed “merely because the taxpayer may derive a benefit from the increased efficiency of the officer or employee insured.”³ In other words, benefiting from having insured employees is fine. Benefiting from the death proceeds is what kills the deduction.

When Business Life Insurance Premiums Are Deductible

Two arrangements produce a genuine deduction: group term coverage offered as an employee benefit, and individual policies structured so the premium is taxable compensation to the covered employee.

Group Term Life Insurance for Employees

Group term insurance is the biggest carve-out. Because the employer is not the beneficiary, Section 264 does not apply. Premiums qualify as an ordinary and necessary business expense under the same rules that govern wages.⁴ The employer’s deduction covers the full premium, with no cap.

On the employee side, the first $50,000 of coverage is tax-free. Above that threshold, the cost of the excess coverage becomes imputed income reported on the employee’s W-2.⁵

The employee-side exclusion depends on the plan passing nondiscrimination tests. A plan meets the eligibility standard if at least 70% of employees benefit under it, if at least 85% of participants are non-key employees, if the eligibility classification is one the IRS does not consider to favor key employees, or if it operates as part of a cafeteria plan under Section 125.⁶ Any coverage amount or type available to key employees must also be available to everyone else. A failed test costs key employees their $50,000 exclusion, but the employer’s deduction is untouched.

Premiums Structured as Compensation

A business can deduct premiums on an individual life insurance policy when the arrangement is set up as compensation: the employee owns the policy, names their own beneficiary, and the premium is reported as taxable wages.³ The company then deducts the payment the same way it would deduct a cash bonus.

The requirement is absolute. The business cannot be a beneficiary in any respect. If the company would collect any portion of the death benefit, the whole arrangement drops back under Section 264 and the deduction disappears.

The deduction also has to satisfy the “reasonable compensation” standard that applies to all wage deductions.⁴ The IRS looks at the entire compensation package — salary, bonuses, benefits, and premium payments together — to judge whether the total is reasonable for the role. These structures are common in what are known as executive bonus plans or Section 162 bonus plans, where the premium payment is transparent and shows up on the employee’s W-2.

Rules by Entity Type

Owners routinely assume they can deduct premiums on their own lives as a business cost. In almost every case they cannot, but the specifics differ across entity types.

Sole Proprietors

A sole proprietor is financially inseparable from the business, so any policy where the proprietor is insured and the business or the proprietor’s estate benefits falls within the Section 264 ban. Personal life insurance premiums are not deductible on Schedule C.³ Group term premiums paid for employees are still deductible; coverage on the proprietor is not.

Partnerships

Partners cannot deduct premiums on their own lives, and the partnership cannot deduct premiums on policies where it stands to collect. The Treasury Regulations illustrate the reach of the rule with a specific example: a principal partner who insures their own life and names another partner as beneficiary to keep that partner engaged is treated as an indirect beneficiary, and the premium is not deductible.³

S Corporation Shareholders Owning More Than 2%

S corporations get treatment that surprises owner-employees. For fringe benefit purposes, the code treats an S corporation like a partnership and any shareholder owning more than 2% of the stock like a partner.⁷ A 2%-plus shareholder does not get the $50,000 group term exclusion. If the S corporation provides group term coverage to that shareholder-employee, the full premium becomes taxable income and must be reported on the W-2.

The corporation can still deduct the premium as compensation, provided the shareholder is a bona fide employee and total compensation is reasonable. Only the employee-side exclusion is lost. If instead the corporation owns the policy and is the beneficiary, standard Section 264 analysis applies and the premium is a non-deductible corporate expense.

Buy-Sell Agreements and Split-Dollar Arrangements

Life insurance is a common funding vehicle for buy-sell agreements, and readers often ask whether that changes the deduction analysis. It does not.

In an entity-redemption arrangement, the business owns policies on each owner and uses the death benefit to buy back the deceased owner’s interest. Because the business is the beneficiary, premiums are not deductible under Section 264.¹ These structures also fall under the employer-owned life insurance compliance rules discussed below.

In a cross-purchase arrangement, individual owners buy policies on each other. Premiums come out of personal funds and are not deductible by either the business or the individuals.

A hybrid approach where the corporation pays premiums on behalf of an owner-employee as compensation can produce a deduction, but only if the premium is reported as taxable wages and total compensation stays reasonable. It works best when the employee, not the corporation, owns the policy.

Split-dollar life insurance arrangements deserve a short flag. They split costs and benefits between employer and employee (or business and owner), but they do not generate a premium deduction for the employer. The IRS taxes them under either the economic benefit regime, where the employee reports the value of insurance protection as income each year, or the loan regime, where the employer’s payments are treated as below-market loans.⁸ Either way, no deduction.

Compliance Rules When the Business Owns the Policy

Even when premiums are non-deductible, businesses that own policies on employees’ lives face separate rules that protect the tax-free status of the eventual death benefit. Section 101(j) limits the tax-free exclusion on an employer-owned life insurance contract to the total premiums paid, unless the contract meets specific exceptions.² Miss the requirements and the gain above premiums paid becomes taxable income to the business.

Qualifying for an exception requires notice and consent before the policy is issued. The employee must be notified in writing that the employer intends to insure their life, told the maximum face amount, and informed that the employer will be a beneficiary. The employee must then consent in writing, including consent for coverage to continue after employment ends.⁹ If the face amount is later raised beyond what was disclosed, new notice and consent are required.

Consent alone is not enough. The insured also has to fall into a qualifying category: an employee at any time during the 12 months before death, or a director or highly compensated employee when the policy was issued. Proceeds paid to the insured’s family or estate qualify, as do amounts used to buy the deceased’s ownership interest from their heirs.²

Businesses must file Form 8925 annually for any employer-owned life insurance contracts issued after August 17, 2006. The form reports the number of insured employees, the total face amount in force, and whether valid consent was obtained.¹⁰

What the Employee Owes on Employer-Paid Premiums

The employee-side tax treatment tracks the type of coverage and how much the employer provides.

For group term coverage up to $50,000, employees pay nothing. The employer excludes the cost from wages for income tax, Social Security, and Medicare purposes, and the eventual death benefit is tax-free to the beneficiary.⁵

Above $50,000, the cost of the excess becomes imputed income. The amount is calculated using IRS Table I rates, which assign a monthly cost per $1,000 of excess coverage based on the employee’s age at year-end. A 52-year-old with $150,000 of coverage has $100,000 of excess coverage. At the Table I rate of $0.23 per $1,000 per month for that age band, annual imputed income is $276, and the employee pays income, Social Security, and Medicare taxes on that figure — not on the full premium the employer paid.⁵ Imputed income from group term life insurance is not subject to federal unemployment tax.

For individual policies treated as compensation, there is no $50,000 exclusion. The full premium goes on the W-2 in Box 1 and is subject to income tax, Social Security, and Medicare withholding. On a large whole life or universal life policy, that can mean thousands of dollars of additional taxable wages in a year the employee never saw as cash.

1
Office of the Law Revision Counsel. 26 U.S. Code 264 – Certain Amounts Paid in Connection With Insurance Contracts
2
Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits
3
eCFR. 26 CFR 1.264-1 – Premiums on Life Insurance Taken Out in a Trade or Business
4
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
5
Internal Revenue Service. 2026 Publication 15-B – Employer’s Tax Guide to Fringe Benefits
6
Office of the Law Revision Counsel. 26 USC 79 – Group-Term Life Insurance Purchased for Employees
7
Office of the Law Revision Counsel. 26 U.S. Code 1372 – Partnership Rules to Apply for Fringe Benefit Purposes
8
eCFR. 26 CFR 1.61-22 – Taxation of Split-Dollar Life Insurance Arrangements
9
Internal Revenue Service. Treatment of Certain Employer-Owned Life Insurance Contracts
10
Internal Revenue Service. Form 8925 – Report of Employer-Owned Life Insurance Contracts