Tax benefits of life insurance for small business owners

You take great care in planning for your small business’ future success and growth. Including life insurance in that plan means having death benefit protection in place, along with often overlooked tax advantages. From business continuation to future planning, these benefits can be important in helping you create a more tax-efficient plan for your business.

Whole life insurance, which is a type of permanent life insurance intended to last for the life of the insured individual, is one product available for your small business planning needs.

Like other permanent products, whole life offers a tax-free death benefit, tax-advantaged cash value growth potential and tax-free loans.

Whole life can also be used by small business owners as a recruiting tool in the form of a Section 162 bonus plan for key employees.

Tax-free death benefit

The primary reason for purchasing life insurance is the death benefit, or payout, that’s provided to the policy’s beneficiaries when the insured person passes away. While the death benefit may be subject to estate taxes, it is typically income tax-free.

Cash value tax benefits

In addition to the tax-free death benefit, whole life insurance also offers some predetermined, guaranteed cash value growth within the policy. This growth accumulates tax-deferred until a withdrawal is made.¹

Tax-free loans

And speaking about withdrawals, policyholders can take loans against the cash value of their life insurance policy without facing immediate tax implications. There are different ways to access the cash value and different tax treatments for each. Be sure to check your policy for the details.

It's also important to keep in mind that this will reduce the death benefit of your policy and any outstanding loans at the time of your death will be deducted from the death benefit.

Section 162 bonus plans

For many small businesses, their employees are the backbone of their success. Establishing a Section 162 bonus plan, or executive bonus plan, allows businesses to provide life insurance benefits to key employees by paying the premiums as a bonus to the executive who owns the policy.²

This arrangement offers cash value growth and death benefits for the employee and a tax-deductible solution for the employer.

Are life insurance premiums tax deductible?

While the premium payments made on individual life insurance policies are not tax deductible, they can be for small businesses in some cases.³ When the business buys life insurance for a group or an individual employee and the business is not the beneficiary of the policy, it is considered reasonable complensation. Both are scenarios where the premiums paid into the policy by the business may be tax-deductible.

Get life insurance advice

Discover the benefits of including life insurance in your small business plan today. Talk with your financial and tax professionals today to learn more.