Tax Facts
8766 / Can a corporation deduct the premiums it pays on a life insurance policy insuring the life of an employee or stockholder?
Updated: October 23, 2026 at 07:16 PM
Based on the IRC Section 264(a)(1) prohibition, a corporation is not permitted to deduct the premiums it pays on a policy insuring the lives of its employee or stockholder if it either is directly or indirectly a beneficiary under the policy. The deduction is denied even if the corporation has only a partial beneficial interest in a policy.1
A corporation cannot deduct premiums it pays on key person insurance or on a policy insuring the life of a stockholder purchased to fund the corporation’s redemption of the insured’s stock. Normally, in these instances, the corporation is both owner and beneficiary of a policy, so a deduction is not allowed by reason of IRC Section 264(a)(1). If the policy proceeds are to be used to pay for stock that is to be surrendered to the corporation, that corporation cannot deduct the premiums even though it may have no right to the cash value of a policy and no right to name or change the beneficiary. In this case, the deduction is not allowed because the premium payments are treated as capital expenditures, rather than ordinary and necessary business expenses, because they are payments for the acquisition of a corporate asset: treasury stock.2
Conversely, if a corporation purchases life insurance for an employee and the corporation has no ownership rights or beneficial interest in the policy, premiums are ordinarily deductible as additional compensation for the employee’s services.3
To be deductible, however, the premium payments must represent reasonable compensation.4
The question of whether compensation is reasonable often arises in the case of a stockholder-employee of a closely-held corporation. If the total amount paid to and on behalf of a stockholder-employee is found to represent an unreasonable return for services, the IRS may treat the premium payments as a distribution of profits or dividends rather than as compensation. This also may be the result where the corporation has kept insufficient records so that there is no evidence, such as board of directors’ minutes, to show that premium payments were intended as compensation.5
If the surrounding circumstances are sufficient to show that the premiums were not paid as compensation, the deduction will be disallowed. In Atlas Heating & Ventilating Co. v. Comm.,6 for example, evidence showed that premiums actually were paid to fund a stock purchase agreement between individual stockholders. Consequently, the premiums were not compensation, but dividends. The policies were owned by the stockholder-employees and proceeds were payable to their personal beneficiaries. The insured individuals had agreed that, on each of their deaths, an amount of stock equal to the proceeds received by the deceased insured’s beneficiaries would be turned in to the corporation and then distributed pro rata to the surviving
stockholders.
For a discussion of the treatment of premiums paid by an S corporation on behalf of its shareholders or employees, see Q 8771.
1. National Indus. Investors, Inc. v. Commissioner, TC Memo 1996-151.
2. Rev. Rul. 70-117, 1970-1 CB 30; Rev. Rul. 74-503, 1974-2 CB 117.
3. IRC § 162(a).
4. Treas. Reg. § 1.162-7.
5. Boecking v. Commissioner, TC Memo 1993-497; Estate of Worster v. Commissioner, TC Memo 1984-123; Champion Trophy Mfg. Corp. v. Commissioner, TC Memo 1972-250.
6. 18 BTA 389 (1929).
A corporation cannot deduct premiums it pays on key person insurance or on a policy insuring the life of a stockholder purchased to fund the corporation’s redemption of the insured’s stock. Normally, in these instances, the corporation is both owner and beneficiary of a policy, so a deduction is not allowed by reason of IRC Section 264(a)(1). If the policy proceeds are to be used to pay for stock that is to be surrendered to the corporation, that corporation cannot deduct the premiums even though it may have no right to the cash value of a policy and no right to name or change the beneficiary. In this case, the deduction is not allowed because the premium payments are treated as capital expenditures, rather than ordinary and necessary business expenses, because they are payments for the acquisition of a corporate asset: treasury stock.2
Conversely, if a corporation purchases life insurance for an employee and the corporation has no ownership rights or beneficial interest in the policy, premiums are ordinarily deductible as additional compensation for the employee’s services.3
To be deductible, however, the premium payments must represent reasonable compensation.4
The question of whether compensation is reasonable often arises in the case of a stockholder-employee of a closely-held corporation. If the total amount paid to and on behalf of a stockholder-employee is found to represent an unreasonable return for services, the IRS may treat the premium payments as a distribution of profits or dividends rather than as compensation. This also may be the result where the corporation has kept insufficient records so that there is no evidence, such as board of directors’ minutes, to show that premium payments were intended as compensation.5
If the surrounding circumstances are sufficient to show that the premiums were not paid as compensation, the deduction will be disallowed. In Atlas Heating & Ventilating Co. v. Comm.,6 for example, evidence showed that premiums actually were paid to fund a stock purchase agreement between individual stockholders. Consequently, the premiums were not compensation, but dividends. The policies were owned by the stockholder-employees and proceeds were payable to their personal beneficiaries. The insured individuals had agreed that, on each of their deaths, an amount of stock equal to the proceeds received by the deceased insured’s beneficiaries would be turned in to the corporation and then distributed pro rata to the surviving
stockholders.
For a discussion of the treatment of premiums paid by an S corporation on behalf of its shareholders or employees, see Q 8771.
1. National Indus. Investors, Inc. v. Commissioner, TC Memo 1996-151.
2. Rev. Rul. 70-117, 1970-1 CB 30; Rev. Rul. 74-503, 1974-2 CB 117.
3. IRC § 162(a).
4. Treas. Reg. § 1.162-7.
5. Boecking v. Commissioner, TC Memo 1993-497; Estate of Worster v. Commissioner, TC Memo 1984-123; Champion Trophy Mfg. Corp. v. Commissioner, TC Memo 1972-250.
6. 18 BTA 389 (1929).
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