Did you know that life insurance premiums can be deductible? Yes, they sure can in limited circumstances.
We all know that life insurance proceeds are received tax-free on death, so it is commonly understood that the payment of the insurance premium would not be deductible. This statement is true for both personally and corporately owned life insurance polices except when the insurance is assigned as collateral for a loan. Sounds great, however certain requirements must be met in order to receive the deduction, including that the owner and borrower must be the same person and the assignment of the loan must be a requirement of the lender and not just a mere accommodation. If all the requirements are met, then the lesser of the premiums paid and the net cost of pure insurance are deductible.
Another question that is often asked when a corporate-owned life insurance policy is collaterally assigned for a loan is whether the insurance proceeds (less the adjusted cost basis of the policy) can be added to the capital dividend account if the insurance proceeds must first be used to pay off the loan. Fortunately, the answer to this question is a resounding YES for both conventional insurance and creditor insurance.
If you want more information on the deduction of premiums and the addition to the capital dividend account when there is collateral life insurance, be sure to read Glenn Stephens’, PPI’s VP of Planning Services, article for Forum magazine Collateral Insurance, When are life insurance premiums tax deductible?, located on our Professional Resource Centre (Advisor login required).
If you have any other questions regarding estate and tax planning, contact your local PPI office.