You might wonder whether premiums for life insurance are tax-deductible when you file your taxes.
Sorry, there is no one-word answer. The most useful 2-word answer is “Usually – No”.
Are Life Insurance Premiums Tax-deductible?
Canada’s Income Tax Act, (ITA) allows for the deduction of insurance premiums. However, this complicated maze of rules is applicable to specific situations.
In general, premiums for life, disability, and health insurance are not tax-deductible for individuals or companies. Until you know if your particular situation is unique, you can assume that the answer to this question is no. Talk to a tax professional to get a clear picture of the tax deductions available to you.
The information below is intended to assist you in framing the question to a tax professional when discussing your situation.
Life Insurance Premiums – Are They Deductible?
INDIVIDUAL LIFE Insurance
Individuals: Not often. If you use your life insurance policy to secure a loan, you may be eligible for a tax deduction. If this is possible, ask your accountant or tax professional.
Businesses: The same applies as for individuals. If life insurance premiums are used as collateral in a loan, a corporation can deduct them. This is why it’s a good idea to seek tax advice.
GROUP TERM LIFE Insurance
Individuals: No. These premiums are generally paid by your employer and considered taxable income by their employees.
Businesses: Does your company pay premiums for employees? These premiums can be deducted from your tax, provided they are a reasonable business expense.
Learn more: How much life assurance do you need?
LIFE INSURANCE – CHARITABLE GIVING
Individuals: No. However, if the charity has the policy, you can receive a tax credit. What is a tax credit? A tax deduction can lower your taxable income, as you may be aware. However, a tax credit directly lowers the amount of taxes that you owe.
What happens if you are the beneficiary of the policy, but not the owner? You don’t get tax credit for premiums paid, but your estate receives a tax credit to cover the death benefit that the charity eventually gets. The death benefit is the money that a beneficiary receives when an insured person passes away. If you are interested in this strategy, please seek tax advice.
Businesses: Yes, provided the charity holds the policy. For this strategy, you should seek tax advice.
Life Insurance Pay Outs are Tax Free
The thing to remember is the payout from a Life Insurance policy is usually completely tax free. If you have not deducted any premiums, the payment is tax free. The payout can be hundreds or thousands times more than the premiums paid into the policy.