Are Life Insurance Premiums Deductible For Corporations? | Deduction Rules

Life insurance premiums are deductible in pay-based setups where the company is not a policy beneficiary and the cost is treated as compensation.

Corporations buy life insurance for two broad reasons. One is business protection: cash to keep payroll moving, keep lenders calm, or fund an ownership change after a death. The other is employee pay: a benefit offered as part of what the company pays people to do their jobs. The tax result flips based on that purpose.

If you’ve heard “life insurance isn’t deductible,” you’ve heard a rule that fits one common pattern: the company buys a policy, names itself as beneficiary, and plans to collect the death benefit. That pattern usually blocks a deduction. Still, many companies also run life insurance as a compensation benefit, and those premiums can land on the deductible side when set up and reported the right way.

This article shows how to sort corporate life insurance premiums into deductible and nondeductible buckets, how ownership and beneficiary choices drive the outcome, and what records make the tax treatment easy to defend.

Are Life Insurance Premiums Deductible For Corporations? What The Tax Code Allows

A corporation can usually deduct ordinary business costs. Insurance often fits that rule. Life insurance is different because Internal Revenue Code §264 blocks a deduction in a common situation: when the taxpayer is directly or indirectly a beneficiary under the policy.

That rule is about who benefits, not who is insured. A policy can be on an employee, officer, or owner and still be nondeductible if the company stands to receive proceeds. The statutory language is available in 26 U.S.C. § 264.

There is also a cleaner lane where deductions often work: premiums paid as employee compensation, where the employee (or the employee’s chosen beneficiary) receives the benefit and the company is not a policy beneficiary. In that lane, the premium cost lines up with wage and benefit reporting, which is the trail tax reviewers look for.

Two Questions That Decide Most Outcomes

Before thinking about forms or accounting entries, answer these two questions for each policy:

• Who can receive the death benefit? If the company can receive proceeds, the premium is usually nondeductible under §264.
• Is the premium treated as compensation? If the premium is run through payroll or treated as taxable compensation, the business deduction often follows that treatment.

Most confusion comes from mixing these questions. A broker may call something an “employee benefit,” yet the contract can still pay the company at death. Tax treatment follows the contract rights, not the marketing label.

Deductible Premiums In Employee Benefit Setups

Employee life insurance benefits are common because they feel simple on the employee side. The tax side still requires clean handling. The corporation’s goal is to show the premium was paid as part of compensation and that the company is not a beneficiary under the policy.

Group-Term Life Insurance For Employees

Group-term life insurance is the most common arrangement. Employers buy a group policy, employees are covered under that plan, and the benefit goes to the employee’s chosen beneficiary. Employer-paid cost is normally treated as a compensation benefit, and the employer deduction usually tracks the compensation expense.

Wage reporting rules can kick in when coverage exceeds certain thresholds. The IRS lays out employer reporting mechanics in Publication 15-B, Employer’s Tax Guide to Fringe Benefits, and it also maintains a plain-language page on group-term life insurance. Those pages are also useful when you document why the premium was treated as a deductible compensation cost.

Individual Policies Paid As Part Of Compensation

Some companies pay premiums on individual policies that are owned by an employee (or by a trust for the employee’s family). When that premium is treated as compensation, reported properly, and tied to services performed, the corporation may deduct it as wages, assuming total pay is reasonable for the role.

The tax risk rises when the company keeps any policy rights. If the company owns the contract, controls cash value, or can reclaim proceeds, the premium begins to look like a corporate asset purchase, and §264 issues start showing up.

Owner-Employees In Closely Held Companies

Owner coverage can still fit a compensation approach, yet it has to be handled with extra discipline. If the company pays premiums on a policy owned by an owner-employee, the cleanest approach is to treat the payment as compensation and report it as such. If it is not treated as compensation, it may be treated as a distribution or another owner-level item, which usually does not give the corporation a deduction.

For S corporation owners above the 2% ownership threshold, fringe-benefit handling differs from rank-and-file employees. That difference can change how the payment shows up on tax forms and basis schedules. The return should match the actual plan design and reporting method used during the year.

Where Premium Deductions Commonly Fail

These are the patterns that most often lead to denied deductions or forced reclassification during review:

• Company is a beneficiary. If the company receives death proceeds, premiums are usually nondeductible under §264.
• Company owns the policy and keeps contract rights. Cash value control or repayment rights can make the company an indirect beneficiary.
• No payroll trail. A deduction claimed as “employee benefit” with no W-2 or other compensation reporting invites questions.
• Loan-heavy designs. Policies tied to loans and cash value can trigger additional limits under parts of §264 that relate to interest and policy values.

When a policy is bought for business protection and the company expects to collect proceeds, it can still be a smart risk tool. The tradeoff is that the premium usually does not reduce taxable income.

How Common Policy Types Usually Get Treated

Most corporate life insurance falls into a small set of repeatable patterns. Labeling the pattern is often enough to predict the tax direction.

Business-Protection Policies On Leaders

Companies often insure a founder or a lead revenue producer so the business has cash after a death. In these policies, the company usually owns the contract and names itself as beneficiary. Under §264, premiums are generally nondeductible because the company benefits from the proceeds.

Buy-Sell Funding

Life insurance is frequently used to fund buy-sell agreements. Some structures use entity-owned policies, while others use cross-purchase policies among owners. Deductibility depends on who benefits and who is claiming the expense. When the business is the beneficiary, premiums are typically nondeductible. When owners buy and own policies personally, the business is usually not claiming the expense at all.

Employee Benefit Plans

Group-term plans and employee-owned individual policies are the typical vehicles for deductions. The corporate deduction is easier to defend when the plan is written, offered under a consistent policy, and matched by wage and benefit reporting.

General IRS discussion of when insurance premiums can be a business expense appears in IRS Publication 535 (Business Expenses). That publication helps frame why some insurance costs are deductible while life insurance premiums tied to company-benefit structures are separated out as nondeductible under §264.

Table: Common Corporate Life Insurance Setups And Usual Tax Treatment

This table is a map, not a verdict. Small contract details can change the outcome, so read it alongside the policy pages.

Setup	Who Can Receive Proceeds	Premium Usually Deductible?
Business-protection policy owned by company	Company	No (often barred by §264)
Entity-owned buy-sell funding	Company or owners through the entity	No in most designs
Cross-purchase buy-sell (owners buy personally)	Owners	Not a corporate deduction item
Group-term life insurance benefit	Employee or employee’s beneficiary	Often yes as compensation cost
Employee-owned individual policy, premium treated as wages	Employee’s beneficiary	Often yes if reported as compensation
Company-owned policy with employee named beneficiary but company keeps cash value rights	Employee at death; company may benefit from cash value	Often no or limited; facts drive result
Premium payments that function as owner distributions	Owner’s beneficiary	Usually no; treated as distribution
Premiums paid on policy where company is indirect beneficiary through agreements	Company (indirectly)	Usually no under §264

Bookkeeping Moves That Keep The Tax Treatment Clean

Clean tax results start in the general ledger. A few small choices reduce mistakes.

Split Deductible And Nondeductible Premium Accounts

Use two expense accounts such as “Employee life insurance” and “Company-benefit life insurance (nondeductible).” That split prevents accidental deduction of nondeductible premiums when the year-end close is rushed.

Store The Policy Pages With Accounting Records

Keep the declarations page, ownership page, and beneficiary page with your workpapers. In a review, those pages settle most questions in minutes.

Match Deductions To Wage Reporting

If you treat premiums as compensation, keep the payroll register, the W-2 details, and benefit summaries aligned with the premium payments. Reviewers look for that alignment.

How To Decide Treatment For A New Policy Before You Buy

If you are still choosing a structure, this decision flow keeps surprises away:

1. Decide the purpose: business-protection cash for the company, or compensation benefit for a person.
2. Pick the beneficiary that fits the purpose. If the company will be beneficiary, plan for nondeductible premiums.
3. Pick the owner that fits the reporting method. Employee-owned policies are easier to pair with wage treatment.
4. Write the benefit policy when the premium is part of compensation. Even a short internal memo helps show consistent treatment.
5. Set up accounting and payroll steps before the first premium is paid.

This planning step matters most for closely held companies where a single policy can blur the line between business risk control and owner benefit.

Table: Documentation Checklist For Corporate Premium Deductions

Record Item	What To Keep	What It Shows
Ownership proof	Declarations page and ownership form	Who controls the contract and cash value
Beneficiary designations	Primary and contingent beneficiary pages	Whether the company is a beneficiary
Premium payments	Bank statements or ACH confirmations	Premiums were paid in the tax year claimed
Payroll evidence	Payroll registers and W-2 detail pages	Premiums treated as compensation when deducted
Plan terms	Handbook excerpt or benefit memo	Premiums paid under an employee benefit policy
Approval trail	Board minutes or written consent	Why the company purchased the policy
Tax workpaper mapping	Schedule tying premiums to return lines	Deductible vs. nondeductible classification
Year-end reconciliation	List of all policies with owners and beneficiaries	No policy was omitted or misclassified

Mistakes That Trigger Reclassification

These mistakes show up often because they feel small during the year and then snowball at tax time:

• Assuming “insurance expense” is always deductible. Life insurance needs a separate pass because §264 can bar a deduction.
• Skipping beneficiary review. A single beneficiary line can flip the treatment, even when the insured person is an employee.
• Paying premiums for an owner without compensation reporting. That often turns into a distribution, not a deductible wage cost.
• Mixing policies in one account. That creates a messy adjustment schedule and raises the odds of an error on the return.

Fast Self-Check Before You File

Use this short check for each life insurance payment line item:

1. Read the beneficiary page. If the company can receive proceeds, treat premiums as nondeductible unless a narrow exception clearly applies.
2. Read the ownership page. If the company owns the contract or controls cash value, treat the arrangement as company-benefit life insurance unless you have written terms that show a compensation design.
3. If you plan to deduct premiums, confirm you have a payroll trail or other compensation reporting that matches that plan.
4. File policy pages and payment proof together so the story is complete if the return is questioned.

When these pieces line up, the deduction treatment tends to match the intent behind the policy purchase, and the return reads cleanly to a reviewer.