Donna Genie (Calculated Moves) explains officer's life insurance and its U.S. tax implications: why premiums are commonly not deducted (because deducting shifts taxable income to the beneficiary on payout), when a deduction might make sense (if the business is the beneficiary and uses proceeds to replace lost income), and a worked numeric example showing a $2,000 premium yielding a ~25% ($500) tax saving versus a potential $1,000,000 taxable death benefit to a spouse.
Questions this video answers
$2,000 (spoken as '20, let's make it $2,000').
About 25%, or $500.
$1,000,000.
Chapters
Let's talk about the most exciting part of your day. Officers life insurance. I know, I know I'm making a little joke here, but officers life insurance is a confusing thing that many people don't understand and they don't feel like it has a rhyme or reason on whether it's deductible or not. So we're going to dive right in. I'm Donna Bordeaux with calculated moves and I work with business owners to make sure that they are saving all the money that they can on tax strategies and that they're growing their business and in the most beneficial way possible and making a good life for themselves. Officer's life insurance is often one of those things people hear about and they say, well, I don't really want to spend on that because it's not deductible. Let's talk about why it's not deductible or when it is deductible. The reason that we hear about officers life insurance not being deductible is based on the benefits. So in the world of taxes, anytime you take a tax deduction for something, somebody else has income. So it's kind of a yin and a yang. If you get a deduction, somebody else has the income. When we talk about officer's life, the reason that you don't want to take the deduction, you can, but you don't want to. Because if someone gets the benefits from that officer's life insurance policy paying out upon death, then if you took a deduction, they have to pay taxes on the proceeds. So it's really not worth it. Because let's take a little example. I was working on a tax return today and a client paid 20, let's make it $2,000 for officers life insurance last year. With the taxes, they're probably going to save about 25% of that or $500. So they might save $500 by deducting that $2,000 premium. But let's say that next year he were to pass away and his wife were to receive the 1 million benefit of that life insurance policy. If he took that deduction to get that measly $500, that means her million dollar payout is taxable. All right, you've heard how the math works. When your income is up in a year, his wife would probably lose half of that to taxes. At the end of the day. Terrible. That means he really only paid two thousand dollars to get a five hundred thousand dollar life insurance policy. At the end of the day, if you, if you wanted a $500,000 policy probably could have got that for far less. So that's the reason we don't typically see officers life insurance being deducted. Now, if the case is that it's used and the business itself is the payee on that policy, the beneficiary, sometimes you will see that because that's going to be taxable income to the company that they're going to use to replace the income of that lost partner or lost valued employee. But in most cases for small businesses, officer's life insurance should not be deducted because you don't want to cut your benefit in half if someone were to receive that policy payout upon death. So hope that helps make the officer's life insurance mystery a little bit easier to understand and help you navigate the waters of why you probably don't want to deduct that on your taxes. Sam.
