Is Life Insurance a Business Expense? A Detailed Analysis

Deciding if a particular expense is eligible for a tax deduction can pose a challenge for both business proprietors and independent contractors.

While self-employed individuals can generally deduct operational expenses, there are certain overhead items that prove challenging to classify.

Is Life Insurance a Business Expense?
Image source (Canva)

What is a Business Expense?

When it comes to tax definitions, it’s advisable to refer directly to the Internal Revenue Service (IRS).

According to the IRS, a business expense encompasses the operational costs of running a business, and generally, these expenses are deductible if the business is oriented towards making a profit.

For an item to qualify as a business expense, it must align with the concept of an ordinary expense. In simpler terms, an ordinary expense is one that is commonplace within your industry.

For instance, if you operate a restaurant, the costs associated with food and raw ingredients are typically considered ordinary and necessary expenses for the business.

It’s crucial to note that a business expense should not fall under the categories of personal expenses, capital expenses, or expenses used in calculating the costs of goods sold.

Having grasped the fundamental definition, the next step is to explore the specific circumstances in which you can claim life insurance as a business expense.

Examples of Business Expenses

Considering taxes and deductions, seeking advice from a tax expert is advisable.

Nevertheless, the following outlines several typical business expenditures:

  1. Phone and internet expenses
  2. Computers, printers, and software costs
  3. Mileage and meal expenses
  4. Employee salaries and benefits
  5. Education, webinars, and certification fees
  6. Legal expenses
  7. Contributions to tax-deferred retirement accounts

When Can You Claim Life Insurance as a Business Expense?

Is Life Insurance a Business Expense
Image source (Sapling)

Life insurance is usually not a business expense. Even if you’re self-employed, your premium is seen as personal and isn’t tax deductible.

Small business owners often wonder about group life insurance and key person life insurance in this context.

Read more: How to get bonded and insured for a small business

Can Life Insurance Be a Business Expense if It Is an Employee Benefit?

When employers offer group life insurance to employees, the premiums they cover are a business expense.

However, there’s a caveat: the death benefit from this coverage becomes taxable for the beneficiary, potentially facing taxes up to 40%, leading to an unexpected reduction in the life insurance payout.

Can Life Insurance Be a Business Expense if It Is Key Person Life Insurance?

Businesses buy key person life insurance for financial protection.

This coverage applies to individuals crucial to business operations, like founders or essential employees.

Examples include a creative director for a unique hotel or a beloved host for a reality show.

If the insured key person dies, the business receives the death benefit.

This payout can cover revenue loss or aid in hiring a replacement.

However, debate exists over whether key person life insurance is a business expense.

Many tax experts argue against it, as you can’t claim premiums if the business is the beneficiary.

Do You Need Life Insurance as a Business Owner?

Whether you operate as an LLC, S-Corp, or are managing your own business, there are numerous considerations to ponder when it comes to the future of your enterprise and the well-being of your family.

Self-employed individuals and business proprietors often lack the perks enjoyed by corporate employees. If you haven’t established a retirement account or secured group term life insurance, it’s crucial to contemplate the potential repercussions for your loved ones in the event of your demise.

Moreover, if you’ve successfully built a small business, it’s essential to assess its ability to sustain operations without your presence.

In the event of your demise with proper insurance coverage, the life insurance payout from your policy can be utilized to address various needs of your beneficiaries—whether it’s settling debts, supplementing income, covering the mortgage, or supporting the business during the transitional period.

Term Life Insurance for Business Owners

Owning a business comes with its share of challenges, but managing term life insurance doesn’t have to be one of them.

Bestow has simplified the process of obtaining term life insurance, making it incredibly convenient. Applying online takes just a few minutes, and there’s no need for a medical exam. Plus, you’ll receive a same-day decision.

For business owners, term life insurance can offer a valuable financial safety net for your loved ones, providing them with the time needed to sustain your business in the event of your passing.

While it may not be considered a business expense, Bestow offers affordable rates starting at just $11 per day.

Experience the ease and affordability of Bestow – your stress-free solution. Begin with a complimentary quote and delve into details about coverage, terms, and life insurance payouts at the Bestow Learning Center.

 

Leave a Comment