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Is Insurance an Expense?

Insurance premiums can be deductible or nondeductible expenses, depending on the circumstances. Typically, personally owned insurance premiums are not deductible; however, insurance benefits from personally owned policies are generally tax-free. However, businesses that offer health insurance, disability insurance, or up to $50,000 of term life insurance to their employees as employee benefits can deduct the costs of premiums as a business expense. When they do, any disability payments to employees are taxed as income.

  1. Disability Insurance

    • Premiums for personally owned disability income insurance is not generally tax deductible. However, if you should become disabled, benefits paid under a personally owned disability policy are tax-free. Businesses can deduct insurance premiums paid on their employees' behalf as an ordinary business expense. If the employer pays part of the premium, a corresponding percentage of the premium is taxed as income to the beneficiary, if the policy pays a claim.

    Health Insurance

    • Individuals may be able to deduct the cost of medical insurance premiums, to the extent these premiums, plus the costs of medical goods and services received during the year, exceed 7.5 percent of the taxpayer's income. Businesses offering health insurance to their employees, however, can deduct the full costs of offering the medical insurance as a business expense. While employees cannot take a deduction for group insurance premiums, these premiums are typically paid in pretax dollars.

    Life Insurance

    • Generally, life insurance premiums are not tax deductible to the employer or the employee, except for the employer deduction allowed for up to $50,000 in group term life insurance. However, life insurance death benefits are generally tax-free to the beneficiary. This is important because a sudden lump-sum death benefit can have the severe but unintended effect of pushing the beneficiary into a high tax bracket.

    Long-Term Care Insurance

    • A portion of long-term care insurance premiums may be tax deductible. You can deduct $330 if you are age 40 or younger. You may deduct $620 per year from age 41 to 50, $1,230 for age 51 to 60, up to $3,290 for ages 61 to 70, and up to $4,110 for age 71 or older. Not all long-term care insurance premiums qualify.

    Property and Casualty Insurance

    • Typically, property insurance and professional liability insurance is tax-deductible, provided the insurance is directly work related. To qualify for the tax deduction, any property insured must be used to produce income. Property insurance premiums are deductible as long as the property in question is a rental property and produces income. If you have a home office, you can deduct a portion of your insurance premiums as a business expense.

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