Life Insurance Premiums Tax Deductibility Feature
It is a fact that many people own life insurance policies to avoid the payment of whopping taxes. Tax treatments on Life insurance policy benefits depend on the type of policy owned. However, if you are about to purchase a life insurance policy for the first time, the most common pondering question will be ‘are life insurance premiums tax deductible’.
Let us discuss about how tax treatments are done on a life insurance policy. Subject to many rules, the tax treatment on different life insurance policies may vary.
Premiums paid on life insurance and tax deductibility
Generally, premiums paid on a life insurance are not tax deductible, except in the case of payments made by your employer. The reason why the tax deductibility is not included is that the amount paid as premium cannot be considered as an expense.
While the employer pays the insurance premium amount, it is considered as a business expense and hence tax deductibility is applicable. The payments for such insurance policies are deductible from the business’s income. In case if it provided as part of compensation, it is eligible for tax deduction under the Bonus Plan rules. The business firm can deduct the amount from the earnings amount. If you and your employer share the premium payments on your life insurance, only that payment made by the employer is considered eligible for tax deductions.
In certain instances, the benefits are not paid in full. Instead, the payment is made within a certain amount of time. Usually, the benefits are not taxable; however, if the interest is paid in the payment, the interest amount is taxable. However, dividends received are not taxable. Benefits paid on accelerated basis are also not taxable. It is also possible to obtain tax exemption, if the policyholder borrows the loan against the cash equivalent of the policy, provided he pays off the loan amount within the period of policy.
Life Insurance Premiums And Tax Deductions Clause
Subject to certain limitations, the IRS rules allow policyholders to deduct medical and dental expenses from the taxable income. In fact, individuals meet their medical and dental expenses via their medical insurance policies. The health insurance premiums paid comes under medical expenses and are thus eligible for tax deductions. In case the total medical expenses incurred goes beyond 7.5 percent of the adjusted gross income, the amount that exceeds the percentage is eligible for tax deductions.
Know about the tax deductions rules so that you could avoid pondering over ‘are life insurance premiums tax deductible’. In fact, there are many rules that allow you to benefit from your life insurance policies by way of its tax deductibility feature.