When Are Premiums on Business‑Owned Life Insurance Deductible?

Deductibility Basics

Premiums for a business‑owned life insurance policy are deductible only when the policy is an owned policy and the business is the policy owner. If the policy is a paid‑up, non‑participating, or endowment policy and the business holds the ownership interest, the premiums may qualify as ordinary business expenses.

Types of Policies That Qualify

Typical qualifying policies include:

• Whole life or universal life policies where the business owns the contract.
• Key‑person policies written on executives or employees whose loss would harm the business.
• Certain term policies if the business pays the premiums and owns the contract, though term policies rarely provide long‑term benefits.

Ownership and Control Requirements

The IRS requires that the business own the policy and have legal control over the proceeds. If the business is merely the insured, the premiums are not deductible. Likewise, if the policy is owned by a trust or an individual, deductibility is lost.

Tax Treatment of Policy Proceeds

When the policy is owned by the business, the death benefit is generally not taxable to the business. However, if the business is a corporation, the benefit may be treated as a taxable dividend unless specific exclusions apply.

Reporting and Documentation

To claim the deduction, the business must report premiums as an expense on its income statement and attach Form 1125‑C or other relevant tax forms. Keeping accurate records of policy ownership, premium payments, and any related corporate resolutions is essential for audit compliance.

Key Takeaway

Only premiums paid on policies that the business owns and controls are deductible. If the policy is owned by an individual or a non‑business entity, the premiums are personal expenses and not tax‑deductible.