Insurance 101

Is Insurance Tax Deductible?

Find out if the most common types of insurance are tax deductible.

Is Insurance Tax Deductible?

The short answer? Yes, it probably is, so if you pay an insurance premium, you should check and see whether you can use it to get a tax deduction. 

As we enter tax season, it’s more important than ever to know if insurance is tax deductible, but different types of insurance might deal with tax deductions differently. The IRS provides the latest information on tax deductions, but it can be difficult to navigate their information, especially when you want to know something specific about insurance tax deductions. 

Also Read: What Is An Insurance Deductible?

In this guide, we’ll go over what kinds of insurance are tax deductible and what that might mean for you.  

What Is Tax Deduction?

Pretty much all taxpayers want to reduce their tax liability, which is how much payment they owe to an official tax authority. If you’re eligible for tax deductions, it means that you can reduce the amount that you will have to pay. 

A tax reduction typically means that you paid for something that helped produce additional income. When you’re filing your federal income tax, you can deduct relevant expenses from your taxable income. This can help you save money each year. 

If you pay an insurance premium that is tax deductible, it means that you can deduct those expenses (or a portion of them) from your taxable income. This lowers your tax liability and ultimately could save you a significant amount of money. That’s why many taxpayers opt to itemize their deductions and figure out which expenses are deductible. 

Some taxpayers will decide to take what is called a standard deduction instead of any itemized deductions. Standard deductions’ monetary values may change from year to year, but for 2022 the standard deduction was anything from $12,950 to $25,900 according to the IRS. 

A reason to take the standard deduction based on filing status (e.g. filing as single, married, heads of household, etc.) is that you don’t want to go through the trouble of itemizing your deductions, which can take longer and be more complex. This is because itemizing deductions necessitates that you comply with record keeping regulations and comes with certain legal requirements. 

Is Health Insurance Tax Deductible?

The topic of whether health insurance is tax deductible is a bit complex. It depends, primarily, on how you pay for your health insurance, amongst other factors.

If you pay your health premium indirectly through your employer, you will probably be unable to get a tax deduction for your entire health insurance premium. You will need to exclude in medical expenses the portion that your employer pays for on your behalf. This generally applies if you need to file a W-2.

Meanwhile, if you are self-employed, it is a more straightforward process. You should be able to deduct the health insurance payment expenses from your taxable income. This means that you could save a sizeable amount of money by itemizing your own deductions as opposed to taking a standard deduction. 

If you have medical expenses that end up getting reimbursed, those cannot be deducted from your taxable income. An example of this situation would be if you gain premium tax credits that reduce the amount you need to pay for your health insurance. 

Is Life Insurance Tax Deductible?

Life insurance is a good way to protect your loved ones financially in case of untimely death. However, life insurance is generally not tax deductible, which means that you won’t be able to get a tax deduction using any life insurance premiums that you may be paying.

Also Read: Average Life Insurance Cost For Individuals & Families

For taxpaying businesses though, life insurance may be tax deductible. This is because you would be paying premiums on behalf of your business’ employees. 

Other exceptions to the rule of life insurance not being tax deductible also exist. Here are some instances where you might be able to deduct your life insurance premium from the total income tax. 

Group term life insurance 

Group term life insurance coverage is provided by some business owners, typically for small businesses. The total benefit limit can’t exceed $50,000 because above that amount, it would be subject to other tax-related requirements. If you operate a small business and offer group term life insurance coverage to your employees, and also pay the premiums on behalf of them, then you can exclude the first $50,000 of group term life coverage from the business income tax. 

Charity life insurance 

If you gave life insurance to charity, then you are likely able to deduct the premium costs from your taxable income. This can be done if you transfer your life insurance coverage to a charity. Gifting a policy to a qualifying charity might turn your premiums tax deductible, even the ones that were paid by you into the policy before you gifted it to the charity. 

162 executive bonus plans 

If your key employee, such as a business executive, has individual life insurance coverage on them, you might be able to deduct those premiums you pay if the key employee reports that premium as taxable income. 

Are death benefits taxable? 

Beneficiaries who receive a payout from the policyholder’s life insurance generally don’t need to report those benefits as part of their income tax. They are income tax free. Still, death benefits from life insurance may have other kinds of requirements and exceptions. 

Is PMI Tax Deductible?

PMI stands for private mortgage insurance. Mortgage insurance is also known as lenders mortgage insurance. If your down payment for your mortgage was less than 20% of your home’s purchase price, your lender might require you to purchase private mortgage insurance. 

Many people who receive financing to purchase homes may need to pay private mortgage insurance premiums. 

If you are considering buying PMI or already have PMI, it’s a good idea to find out whether your PMI is tax deductible so that you can save some money. Unfortunately, it is not currently available for tax deduction. 

Interestingly, private mortgage insurance was tax deductible for the 2020 tax year. Optimistically, it might become tax deductible again in the future. 

Is Homeowners Insurance Tax Deductible?

Homeowners insurance is meant to protect property that you own or protect you from incidents occurring within the property. 

Generally, homeowners insurance won’t be tax deductible. If you use your home as a source of income instead of as a home, then it may be tax deductible. 

A source of income means, for example, that you use a part of your property as an Airbnb and you rent it out. It doesn’t have to be Airbnb, it can be other home-sharing apps or options. 

Or, perhaps you have a home office where you work remotely. That may also qualify your home insurance premium for tax deductions. 

Another noteworthy exception where homeowners insurance may be tax deductible is if you own a property, but only for the purpose of investments. In this case, it isn’t a home and is instead something through which you can generate income.

However, even if your homeowners insurance premium is not tax deductible, it’s not a sign to give up on tax deductions if you are a homeowner. There are numerous other tax deduction options for property homeowners. If you itemize your taxes each year, you could claim several kinds of tax deductions. 

Tax deduction options for homeowners, outside of a deductible homeowners insurance premium, include: 

  • Mortgage point deduction 
  • Mortgage interest deduction 
  • Property tax deductions
  • Home office deductions
  • Rental deduction
  • Home improvement deductions 
  • Capital gains tax deduction/exclusion

Is Medical Insurance Tax Deductible?

Medical insurance is very important for continued safety and health. However, many people wonder whether medical insurance is tax deductible. It’s an understandable question because without medical insurance, someone might be prevented from working and receiving income. 

In some cases, medical insurance is actually tax deductible! Health insurance premiums are sometimes deductible from federal taxes. So the question is, when can you deduct this amount from your taxes? 

Here are several factors that determine if your medical insurance premiums can be deducted from your federal taxes:

  • If you pay your premiums directly by yourself 
  • If your medical expenses were more than 7.5% of your yearly income 
  • You itemize your tax deductions, as opposed to taking the standard tax deduction 

As you can see, you need to first determine your eligibility for whether your medical insurance premium will be tax deductible.  

Essentially, if you are self employed and pay all of your health insurance premiums directly, you should be able to deduct those expenses from your taxable income. 

Self employed health insurance premiums can be deducted from your taxable income by filling out the Form 1040’s “above the line” deduction section. That’s good news because it means that in this case, you don’t have to itemize deductions manually on Schedule A. 

However, health insurance premium tax deductions are much stricter if you are not self employed. If you are a W-2 employee, you’ll only be able to deduct a certain portion of the premium from your taxable income.  

Is Mortgage Insurance Tax Deductible?

Not anymore. Mortgage insurance, sometimes required by mortgage lenders before they will agree to finance a home, is not currently deductible from taxable income. 

Mortgage insurance was tax deductible for a while in the past if you were paying for private mortgage insurance, also known as PMI. However, the federal government discontinued allowing mortgage insurance premiums to be tax deductible. 

Since there have been precedents for people’s mortgage insurance tax becoming eligible for tax deductions, it is a good idea to check for the most up to date information from the federal government on whether mortgage insurance has become tax deductible.  

Is Long-Term Care Insurance Tax Deductible?

Yes, long term care insurance can be tax deductible. 

Long term care insurance is an important kind of insurance that provides coverage for long term necessities such as nursing homes, assisted living, and other kinds of care. A majority of people might end up needing long term care once they have reached the age of 65, which makes long term care insurance a popular insurance coverage for those who are concerned about daily care expenses. 

Being able to deduct long term care insurance premiums can be a great way to save you some money. If your long term care insurance premium qualifies for tax deduction, you can include it under “medical expenses” on Form 1050. 

It’s important to note that there are certain eligibility requirements and deduction limits when it comes to long term care insurance tax deductibility. For example, to claim deductions, your total unreimbursed medical expenses need to be more than 7.5% of your adjusted gross income.

Insurance tax deductibility FAQs

1. How do I know if my premium is tax deductible? 

Each kind of insurance coverage can have different eligibility statuses. It’s important to check each kind of insurance you have to see whether it is tax deductible. 

Generally, if your premium enables you to gain an income, it is more likely to be tax deductible. Even if the premium itself is not deductible, you may still be able to find other ways to make deductions from your taxable income. 

2. Is it better to itemize deductions or use the standard deduction?

This depends on numerous factors, such as your deductions, income, filing status, and more. The question of where is the breaking point of itemizing deductions being more valuable is a very essential one in financial planning.

Like all things finance and tax-related, it is advisable to check with an official professional about them. Our articles are not meant to provide financial or legal counsel. If you find that your tax situation is quite complicated or you find itemizing deductions a challenge, it’s generally helpful to get personalized advice from a tax professional. 

3. How do I get better insurance value?

If you’re looking for more information on insurance, Worth Insurance has you covered. Our expert insurance advisors can help you better understand the concepts of premiums while shopping for competitive insurance coverage.

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