Is Life Insurance a Deductible Business Expense?

(Get your answers from an expert.)


Can I deduct the cost of life insurance for my employees?
Does it cost anything for my employees?
Can you offer an example of how it could cost employees money?
Does the cost from year-to-year ever change?
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Can I deduct the cost of life insurance for my employees?

I'm thinking about buying group life insurance coverage for my employees, but am still weighing the pros and cons of doing so. If I purchase group life, is the cost deductible as a business expense? If so, I may have more of an incentive to purchase it.

This is a question that I'm asked a lot. After all, it's absolutely normal for you, as a business owner, to consider the cost-benefit analysis of anything for employees.

Before I jump to the answer, know that life insurance is deductible as a qualified benefit if you meet the tax code requirements. I'm not going to dive too deep into the tax code nitty-gritty, but a significant number of plans qualify. The key is to make sure that the life insurance you offer meets the requirements so that it's deductible as a qualified benefit.

This means that the short answer is yes, it's deductible. However, you should always make sure the plan qualifies under the tax code, otherwise it might not be. A independent insurance agent will be able to help you through this process.

Does it cost anything for my employees?

Let's say I decide to offer my employees a group life policy. Will it cost them anything to enjoy the benefits or is it free?

It could be free or it could cost your employees a small amount of money. The general rule that you can keep in mind is that it is free.

It's only problematic if you hit the IRS cap. The cap is a limit where if the life insurance proceeds to any employee fall above the cap, the employee has to pay taxes on that portion of the benefit. Generally speaking, this amount is incredibly small. 

In 2018, the Internal Revenue Code offered an exclusion for the first $50,000 of group-term life insurance coverage, provided that it was under an employer's policy. Any coverage in excess of $50,000 in includable in income using the IRS Premium Table and is subject to Social Security and Medicare taxes.

I'll spare you the calculations, but most employees will pay just a few dollars out of  each paycheck for coverage above the cap.

Can you give an example of how it could cost employees money?

As always, let's solidify this concept with an example. 

Let's assume that you're operating a standard business where most employees earn less than $100,000 annually and the group life coverage is equal to 1x the salary. Now assume that one of the executives makes $200,000. That executive would have to pay taxes on a portion of that benefit. The taxes are designed to equalize the premium it would cost to have a life insurance policy that high above the minimum.

In this scenario, the cost might be as little as $5 per paycheck. For most individuals, the cost is negligible (if it's noticeable at all). 

Does the cost from year to year ever change?

It can, but if it does, it's usually only by a couple of dollars, if that. The IRS adjusts the premium table I mentioned above. And, if it does, that's what impacts how much will come out of paychecks that fall above the threshold. 

If you're still confused, a independent agent is always your best resource for group life insurance plan options and the potential employee costs.

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