Usually no. If your business is directly or indirectly a beneficiary of the policy, the premiums are not deductible — that is IRC §264(a)(1), and it covers the two most common cases: key-person insurance and company-funded buy-sell policies. The one real exception is life insurance for employees where the business is not a beneficiary — most often group-term life under §79. The single sentence to remember: is the business a beneficiary? Then it's not deductible.
If you own an LLC, S-corp, or small corporation and you pay life-insurance premiums out of the business — key-person cover, a buy-sell policy, or group cover for staff — you have probably been told "yes, it's a business expense." Often by the person who sold you the policy. The honest answer is that it usually isn't, and the reason is worth understanding, because once you see why the rule exists, the exceptions make sense too.
The short answer, up front
The controlling rule is IRC §264(a)(1): no deduction is allowed for premiums on any life insurance policy covering the life of an officer, employee, or anyone financially interested in the business, when the business is directly or indirectly a beneficiary under the policy. That single condition — the business being a beneficiary — is what kills the deduction in the cases that come up most.
The exception is narrow but real: premiums on life insurance for employees where the business is not a beneficiary can be deductible as compensation under §162 — most commonly group-term life under §79.
Why §264 exists — the logic worth understanding
The death benefit from a life-insurance policy is generally received income-tax-free under §101(a). The tax code does not let you deduct the cost of producing a tax-free receipt. Once you frame it that way, §264 stops feeling arbitrary: property and liability insurance are deductible because their payouts are generally taxable or reduce a deductible loss; a life-insurance payout is tax-free, so its premium is not deductible. Same logic, opposite result.
The common cases, one by one
Here is how the rule lands across the arrangements a business owner actually holds. Notice that the deductible column is almost entirely "no" — and that the one "yes" is the case where the money leaves the business and benefits an employee, not the business.
| Arrangement | Premiums deductible? | Why |
|---|---|---|
| Key-person insurance (business insures an owner/key employee, business is beneficiary) | No | §264(a)(1) — business is the beneficiary. Death benefit generally tax-free under §101(a), but see the §101(j) trap below. |
| Entity-purchase buy-sell (company owns and funds the policy) | No | §264(a)(1) — the business is the beneficiary. |
| Cross-purchase buy-sell (owners personally insure each other) | No | Personal premiums; not a deductible business expense either. |
| Personal life insurance paid from the business account | No | Treat as an owner draw/distribution, not an expense. This is a bookkeeping-miscoding issue as much as a tax one. |
| Group-term life for employees (§79, business not a beneficiary) | Yes | Deductible by the employer as compensation. First $50,000 of coverage is excludable to the employee; coverage above $50,000 creates imputed income under the Table I rates (Treas. Reg. §1.79-3). |
| Split-dollar arrangements | Complex | Governed by their own regime (Treas. Reg. §1.61-22 / §1.7872-15). This is a professional's conversation, not a DIY deduction. |
For employer-owned life insurance (like key-person cover), the death-benefit exclusion under §101(a) is limited to premiums paid unless the notice-and-consent requirements of §101(j)(4) are met before the policy is issued and an exception applies. Form 8925 ("Report of Employer-Owned Life Insurance Contracts") is the associated annual reporting requirement. Miss the notice-and-consent step and a death benefit you expected to be tax-free can become taxable above premiums paid — a genuine trap that almost no "is it deductible" article covers.
The owner-employee trap
A frequent move is "I'll just run my own life insurance through the S-corp payroll as a fringe benefit." It usually doesn't work the way people hope. Under §1372, a more-than-2% S-corporation shareholder is treated as a partner for fringe-benefit purposes, so the §79 group-term exclusion does not apply — the premiums are generally treated as wages to you rather than a clean deductible fringe benefit. Sole proprietors and partners are not employees of their own business for this purpose either. In other words, the exception that makes group-term life deductible is built for your staff, not for the owner.
What is deductible around this
It would be misleading to leave you empty-handed, because several adjacent items genuinely are deductible:
- Employee health premiums the business pays.
- Disability cover for employees.
- The self-employed health insurance deduction under §162(l) — an above-the-line deduction (not a Schedule C business expense). Note this is health, not life; it is here to close the loop honestly, not to blur the line.
If you have been deducting it
If it turns out you've been deducting life-insurance premiums that §264 disallows, don't panic — it is one of the more common bookkeeping errors, not a red flag in itself. The fix is usually a reclassification: move the premiums from an expense account to an owner distribution. Whether to amend prior returns depends on the amounts and the years involved, and that is a conversation with your tax professional rather than a DIY correction. The cheap version is coding it correctly from the start — which is really a spend-categorization habit.
That last point is the only place ExpenseBot fits this story: it captures your business receipts and bills from Gmail into a Google Sheet you own and helps you keep categories clean, so a non-deductible premium gets coded as a distribution instead of quietly sitting in "insurance expense" all year. It doesn't decide the tax treatment for you — that's your accountant's call — but clean records make the call easy. If you want the broader picture on coding expenses correctly, see how to categorize expenses for taxes, and for the owner-compensation angle, the S-corp election for sole proprietors is the natural next read. Business owners weighing entity choice may also want LLC vs sole proprietorship.
Is the business a beneficiary? Then the premium isn't deductible. Everything else on this page is a footnote to that sentence. And remember: this is tax-treatment information, not advice on whether or how much life insurance to buy — that's a decision for a licensed professional. Estimates — confirm with your tax professional.