Pretax Life Insurance Option
Introduce the idea that life insurance isn’t just about protection — it’s becoming a hot topic among entrepreneurs looking for ways to manage cash, invest wisely, and reduce taxes.
MAPFL BLOG
How High-Income Entrepreneurs Can Turn Life Insurance Into a Tax Strategy
Are you a business owner who’s been approached about using life insurance as a cash management tool or potential investment option within your business? Many of my business owner clients find value in life insurance, not just as an investment, but also as a way to manage cash and take advantage of the additional benefits that come with it.
One of the most common questions I hear is: Can I get a tax deduction for this in my business? Can I use pretax dollars to pay for life insurance? The typical answer is no. Unfortunately, in most cases, you can’t.
But here’s the good news — for a select group of business owners, the answer can actually be yes. While it requires a strong reason and specific circumstances, there are scenarios where you can place life insurance into a pretax vehicle, creating a significant tax deduction that ultimately benefits your retirement.
The opportunity is limited, and only a handful of people will qualify. However, if you or someone you know is a successful business owner with relatively few employees, you might be one of them.
If you’d like to explore whether this strategy could work for you, give us a call. We’d be happy to explain your options and walk you through the details.
Section 1: Why Business Owners Are Looking at Life Insurance Differently
- Life insurance for cash flow stability
- Liquidity options for emergencies or opportunities
- Long-term wealth accumulation and protection
Section 2: The Tax Deduction Question – Can You Write It Off?
- Explain why life insurance is typically not tax-deductible
- Clarify that the IRS considers it a personal benefit, not a business expense
Section 3: The Hidden Loophole – When It Is Deductible
- Introduce advanced strategies like:
- Nonqualified executive bonus arrangements (Section 162 plans)
- Defined benefit or retirement-linked strategies
- Captive insurance or split-dollar arrangements (if applicable)
- Highlight that eligibility is rare but not impossible
Section 4: Who Might Qualify?
- Business owners with
- High net income
- Few employees
- Long-term planning mindset
- Need for tax-efficient retirement planning
Section 5: How to Explore This Strategy Safely
- Emphasize the importance of working with an expert
- The need for IRS-compliant design and documentation
- Avoiding misuse or misclassification
Conclusion + CTA
Encourage the reader to explore whether this opportunity applies to them or someone they know. Offer a consultation or discovery call to assess qualification.
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Pretax Life Insurance Option
Additional Ideas to Expand the Blog
- Include an example or case study
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- SEO keywords to sprinkle in: “business tax strategy”, “life insurance tax deduction”, “executive bonus plan”, “business owner life insurance planning”
Tax Deductibility of Life Insurance Premiums for Business Owners
General Rule: Premiums Are Not Deductible
Under IRC § 264(a)(1), life insurance premiums are generally not deductible if the taxpayer is directly or indirectly a beneficiary under the policy. This means that if a business purchases a life insurance policy and is the beneficiary, the premiums paid are not deductible as business expenses.Taxpayer Advocate Service+1irs.gov+1
Source: IRC § 264(a)(1)
Additionally, IRS Publication 529 explicitly states:irs.gov
“You can’t deduct premiums you pay on your life insurance.”irs.gov+2irs.gov+2Wikipedia+2
Source: IRS Publication 529
Exception: Group-Term Life Insurance
An exception exists for group-term life insurance provided to employees. Under IRC § 79, the cost of up to $50,000 of group-term life insurance coverage provided by an employer is excluded from the employee’s gross income. However, coverage exceeding $50,000 is considered a taxable fringe benefit to the employee.irs.gov+2Wikipedia+2irs.gov+2Wikipedia+2irs.gov+2irs.gov+2irs.gov
Source: IRC § 79
Special Consideration: Executive Bonus Plans (Section 162 Plans)
For certain business owners, particularly those with C Corporations, an Executive Bonus Plan (also known as a Section 162 Plan) can be utilized. In this arrangement:
- The business pays the life insurance premiums on behalf of the employee (which can include owner-employees).
- These payments are treated as compensation to the employee and are thus deductible by the business under IRC § 162(a), which allows deductions for ordinary and necessary business expenses.
- The employee reports the premium payments as taxable income.irs.govTaxpayer Advocate Service+1irs.gov+1
Source: IRC § 162(a)
Limitations and Considerations
- Ownership Structure Matters: These strategies are typically more beneficial for C Corporations. S Corporations and partnerships may face limitations, especially concerning owner-employees.
- Non-Discrimination Rules: To maintain favorable tax treatment, the plan must not discriminate in favor of highly compensated employees.
Policy Ownership and Beneficiaries: The structure of policy ownership and designation of beneficiaries can impact the tax implications.
Conclusion
While life insurance premiums are generally not deductible when the business is the beneficiary, certain strategies, such as Executive Bonus Plans under IRC § 162, can provide a pathway for deductions, especially for C Corporations. It’s crucial to structure these arrangements carefully to comply with IRS regulations and to consult with a tax professional to navigate the complexities involved.
Further Reading:
- IRS Publication 15-B: Employer’s Tax Guide to Fringe Benefits
- IRS Publication 525: Taxable and Nontaxable Income