8765 / What rules govern the deductibility of payment of the premiums on business life insurance?

Life insurance premiums generally are not deductible if the premium payer has any interest in the policy or proceeds.Under IRC Section 264(a)(1), no deduction is allowed for premiums paid on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract. Where Section 264(a)(1) applies, the premiums are not deductible even though they otherwise would be deductible as ordinary and necessary business expenses.¹

The rule under Section 264(a)(1) is an all or nothing rule, meaning that the entire premium will be nondeductible even though a premium payer has a right to receive only a portion of the proceeds. The deduction cannot be divided, and will either be allowed or disallowed in its entirety.² The rule under Section 264(a)(1) applies regardless of the form of insurance, so it makes no difference whether premiums are paid on term, ordinary life, or endowment policies.

Section 264(a)(1) clearly prohibits the deduction for premiums paid where a taxpayer is the premium payer and is also designated as the policy beneficiary. For example, premiums paid on key person insurance, where an employer normally is both owner (and premium payer) and beneficiary of a policy, are nondeductible under IRC Section 264(a)(1).