GUIDEBOOK, 2007 USMTG, 909. Life Insurance Premiums


Life Insurance Premiums

Premiums paid by an employer for insurance on the life of an officer or employee are deductible only if it can be shown that: (1) premium payments are in the nature of additional compensation; (2) total compensation, including premiums, is not unreasonable; and (3) the employer is not directly or indirectly a beneficiary under the policy. [2007FED¶8522.386, 2007FED¶14,002, 2007FED ¶14,008.03, 2007FED¶14,008.12 BUSEXP: 18,154.05 ]. However, no deduction is allowed an employer for premiums paid under a split dollar arrangement (see ¶721). [2007FED¶5907.052, 2007FED¶5508.24 COMPEN: 48,154.05 ].

Premiums on group-term life insurance covering the lives of employees are deductible by the employer if the employer is not a direct or indirect beneficiary. [2007FED ¶6360, 2007FED¶14,003 COMPEN: 48,100 ]. The payment of such premiums generally represents income to the employee to the extent that the coverage provided exceeds $50,000 (see ¶721).

Generally, no deduction is allowed for interest paid or accrued on a debt incurred or continued to purchase or carry any single premium life insurance, endowment or annuity contract. If substantially all the premiums on a life insurance or endowment contract are paid within four years from date of purchase, or if an amount is deposited with the insurer for payment of a substantial number of future premiums on the contract, it is regarded as a single premium contract ( Code Sec. 264(a)(2) and (c)). [2007FED¶14,002, 2007FED¶14,008.021 INDIV: 48,556 ].

Interest on a debt incurred to purchase or continue a life insurance, endowment, or annuity contract pursuant to a plan of purchase contemplating the systematic borrowing of part or all of the increases in cash value is not deductible ( Code Sec. 264(a)(3)). [2007FED¶14,002, 2007FED¶14,008.021 INDIV: 48,556 ]. However, Code Sec. 264(d) allows an interest deduction in limited situations. [2007FED ¶14,002, 2007FED¶14,008.023 INDIV: 48,556 ]. Special rules may permit the deduction of interest incurred for key person policies owned by corporations ( Code Sec. 264(e)). [2007FED ¶14,002, 2007FED¶14,008.023 COMPEN: 48,062 ].