In most cases, no. When your business owns a life insurance policy and your business is the beneficiary — the exact setup behind key person insurance, buy-sell funding, and corporate-owned life insurance (COLI) — the premiums are not tax-deductible. This is not a gray area or an aggressive IRS position; it is written directly into the tax code at IRC Section 264(a)(1), which disallows any deduction for premiums on a life insurance policy when the taxpayer is “directly or indirectly a beneficiary” under the policy. There are a couple of real exceptions where a business does get a write-off — group-term life insurance for your employees and a Section 162 executive bonus plan — and we walk through both below. But the headline for any business owner asking whether life insurance is tax deductible for business owners is this: the premium on a policy your company owns to protect itself is not.
This page is educational only and is not tax or legal advice. Confirm any deduction with your CPA or tax advisor before you file.
The general rule: business-owned life insurance premiums are not deductible
IRC Section 264(a)(1) is short and blunt. It denies a deduction for premiums paid on any life insurance policy when the taxpayer is “directly or indirectly a beneficiary” under that policy. That single rule covers most of the ways a business uses life insurance:
- Key person insurance — the company owns a policy on an owner or an irreplaceable employee and collects the death benefit. The business is the beneficiary, so the premium is not deductible.
- Buy-sell funding — when the business or its owners hold policies to buy out a deceased owner's share, the party that will receive the proceeds is a beneficiary, so those premiums are not deductible either.
- Corporate-owned life insurance (COLI) used to informally fund a nonqualified deferred compensation promise — the company owns the policy and its cash value, so again, no deduction.
It does not matter whether the policy is term or permanent, or whether the business is an LLC, an S corporation, or a C corporation. If the entity paying the premium stands to benefit from the policy, Section 264(a)(1) shuts off the deduction.
Why the IRS says no — and why that is actually good news
The non-deductibility of the premium is the flip side of one of the most valuable features in the entire tax code: under IRC Section 101(a)(1), a life insurance death benefit is generally received income-tax-free. Congress does not let you have it both ways. You do not get to deduct the money going in and collect a tax-free payout coming out.
For most owners, that is a trade worth making. A key person policy funded with modest, non-deductible premiums can pay a six- or seven-figure death benefit to the business with no income tax due — exactly when the company is scrambling to replace revenue, reassure lenders, and keep the doors open. The lost deduction on the premium is small next to a tax-free payout that lands when it is needed most.
Is key person life insurance tax deductible?
No. Key person (sometimes called “key man”) life insurance is the textbook example of Section 264(a)(1) in action: the business owns the policy, pays the premiums, and names itself as the beneficiary, so the premiums are not deductible. If you want the full picture of how the coverage works and how much to carry, see what key person (key man) insurance is and how it works.
But there is a second, sharper trap that catches more business owners than the lost deduction ever does — and it can turn that supposedly tax-free death benefit into taxable income.
The Section 101(j) compliance step most owners miss
For employer-owned life insurance contracts issued after August 17, 2006, IRC Section 101(j) flips the default: the death benefit above the total premiums the business paid is taxable income to the business unless you clear two hurdles before the policy is issued:
- Notice and consent, in writing, before issue. The insured employee must be told in writing that the business intends to insure their life and the maximum face amount; must consent in writing to being insured (including to coverage continuing after they leave the company); and must be told the business will be the beneficiary.
- A statutory exception must apply — for example, the insured was an employee within the 12 months before death, or was a director or a highly compensated employee when the contract was issued.
On top of that, the business must file IRS Form 8925 each year with its income tax return, reporting how many employees it has, how many are insured, the total amount of insurance in force, and whether it holds valid consents. Miss the notice-and-consent step before the policy is issued and, outside a narrow IRS correction window, it generally cannot be fixed after the fact — which is why this is the single most important thing to get right when a business buys life insurance on a person. The same rules apply to corporate-owned life insurance (COLI), because COLI is employer-owned life insurance too.
The exceptions: when your business DOES get a deduction
There are two clean situations where a business genuinely writes off a cost tied to life insurance. In both, the deduction exists because the business is paying compensation to employees — not because it is deducting a premium on a policy it benefits from.
1. Group-term life insurance for your employees
If your business provides group-term life insurance as an employee benefit, the employer's cost is deductible as compensation. Better still, under IRC Section 79 the first $50,000 of employer-provided group-term coverage is excluded from each employee's taxable income. Coverage above $50,000 creates a small amount of “imputed income” to the employee, figured from an IRS table — but the employer's cost stays a deductible business expense. This is the most common way a small business gets a life insurance-related deduction, and it is a real tool for attracting and keeping staff.
2. Section 162 executive bonus plans
Here is the key distinction: in a Section 162 executive bonus plan, the business deducts the bonus, not the premium. The company pays a bonus to a chosen key employee; the employee uses that after-tax bonus to buy and personally own a permanent life insurance policy. The business deducts the bonus as ordinary and necessary compensation under IRC Section 162 (subject to the “reasonable compensation” limit), the employee pays income tax on the bonus, and the employee owns the policy, its cash value, and names the beneficiary. Because the employee — not the business — owns the policy, there is no Section 101(j) problem to manage. Learn more about how a Section 162 executive bonus plan works.
One planning note for pass-through owners: if you own an S corporation or a partnership and bonus the premium to yourself, the deduction largely flows back onto your own return, so the net tax benefit tends to wash out. The structure is most efficient for C corporation owners and for rewarding non-owner key employees — confirm the specifics for your entity type with your CPA.
Buy-sell agreements funded with life insurance
Life insurance is the cleanest way to fund a buy-sell agreement so surviving owners have tax-free cash to buy out a deceased owner's share. The premiums are not deductible (Section 264(a)(1) again), but the death benefit is generally received income-tax-free and goes straight toward funding the buyout. One caution: after the U.S. Supreme Court's 2024 decision in Connelly v. United States, a company that owns the policy and redeems the deceased owner's shares (an “entity redemption”) may have the insurance proceeds counted as a corporate asset that increases the company's value for federal estate-tax purposes — which is pushing many owners toward cross-purchase structures instead. We cover the mechanics in how a buy-sell agreement funded with life insurance works.
Business life insurance and the deduction, at a glance
| How the policy is used | Are premiums deductible? | Is the death benefit taxable? |
|---|---|---|
| Key person insurance (business owns and benefits) | No — IRC Section 264(a)(1) | Generally tax-free if Section 101(j) notice-and-consent was completed before issue and Form 8925 is filed yearly; otherwise the amount above premiums paid is taxable to the business |
| Corporate-owned life insurance / NQDC funding | No — IRC Section 264(a)(1) | Same Section 101(j) rules as key person coverage |
| Buy-sell funding | No — IRC Section 264(a)(1) | Generally tax-free; watch the transfer-for-value rule and the Connelly issue on entity redemptions |
| Group-term life for employees (up to $50,000) | Yes — the employer's cost is deductible as compensation | First $50,000 of coverage is tax-free to the employee (Section 79); coverage above that creates small imputed income |
| Section 162 executive bonus plan | The bonus is deductible — not the premium | Employee owns the policy; the death benefit paid to the employee's beneficiary is generally tax-free |
| Your personal life insurance (owner-bought) | No | Generally tax-free to your family (Section 101(a)(1)) |
What about my personal life insurance as a self-employed owner?
The same rule applies: personal life insurance premiums are never tax-deductible, because you or your family are the beneficiary. This surprises a lot of self-employed people, because your Health Insurance premiums usually are deductible — the self-employed health insurance deduction lets sole proprietors, partners, and S-corp owner-employees write off medical, dental, and vision premiums above the line. Life insurance simply does not work that way. What you get instead is the income-tax-free death benefit that replaces your income for the people who depend on you. For how much and what type of coverage fits an owner, see what kind of life insurance small business owners need.
A few other traps worth knowing
- The transfer-for-value rule. If a life insurance policy is sold or transferred for value, part of the death benefit can lose its tax-free status — unless the transfer fits a specific exception (to the insured, a partner of the insured, a partnership the insured is in, or a corporation the insured is a shareholder or officer of). This matters when policies move between owners or entities, which is common when a buy-sell agreement is restructured.
- “My accountant deducted it” is not proof it was allowed. A surprisingly common error is deducting business-owned premiums that Section 264(a)(1) plainly disallows. If your books show a deduction for a policy the business itself benefits from, flag it before an auditor does.
- The tax-free death benefit is not automatic. As covered above, employer-owned policies need the Section 101(j) notice-and-consent handled before issue and Form 8925 filed every year to keep the proceeds income-tax-free.
Talk it through with The Jordan Insurance Agency
Whether a business can deduct life insurance premiums is really two questions in one: how the policy is structured, and how the death benefit will be taxed when it pays. Getting both right — a deductible-bonus structure where it helps, proper Section 101(j) notice-and-consent where it is required, and the correct buy-sell design after Connelly — is where an experienced independent agent earns their keep.
The Jordan Insurance Agency is an independent agency based in Charlotte, North Carolina. Because we work with multiple carriers, we can compare key person, buy-sell, executive bonus, and personal coverage across companies instead of steering you to a single insurer's product. There is no charge to talk it through and no pressure. Reach out and we will walk you through what fits your business, your entity type, and your goals — and we will coordinate with your CPA or attorney so the tax and legal pieces line up. This page is educational only and is not tax or legal advice.
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