A Guide to Taxation for Life Insurance Premiums

Are life insurance premiums taxable? Or do I get some benefit for looking after my loved ones after I am gone? These are the things that might be going on in your mind if you’re here, reading this. Well, taxation is a very complex subject, at least for most of us.

The good thing is, there are many guides available that can help you grasp complex notions in simple layman’s English. This is one of those. Read on to know whether you need to pay taxes on premiums and also if there are any deductibles.

Do You Need to Pay Taxes on the Premiums?

Generally speaking, there are no taxes on the amount you pay in premiums. This means if your insurance company has quoted you a premium, it is the exact amount of money you’ll pay each month, nothing more. This is because there is no sales tax associated with life insurance.

However, in certain situations, you may have to pay tax on the life insurance premium, but that’s a very rare case; for a traditional way of paying premiums (per month), you don’t have to worry about taxes.

That said, there are some instances where the insured person pays a lump-sum payment as a premium called Prepaid Insurance; the money is adjusted throughout the duration of the plan. That amount starts growing with interest, and so tax is deducted on that growth.

More Over, there’s also a tax on Cash Value, which is the value your permanent life insurance grows in because of the interest. Since the interest is considered as income for the policyholder, it may have some tax implications.

So this is all there is to know about the taxes on your premiums, now. Let’s move to the other part of the guide, which is the tax deduction.

Tax Deduction on Life Insurance Premiums for Individuals

Since the Income Tax Act of Canada is nothing less than a maze of technical jargon and complex rules, it’s hard for you to understand tax deduction laws, so asking your insurer about this is the right thing to do. That said, in most cases, premiums paid for your own personal insurance are not tax-deductible.

Whether its life, disability, or health insurance, the premiums are usually not tax-deductible, whether you’re an individual or a business. So it’s better to assume you won’t be getting any tax relaxation from those premiums until your insurer says otherwise.

So What About the Life Insurance Used for Charity?

It seems you’ve heard about the tax generosity of Canada’s government for people who like to share with others. However, the answer is still no. No tax-deductible for you. But the good news is, you can get a tax credit for the premiums you pay if the policy is owned by a charity.

If you don’t know, a tax credit reduces the tax amount you owe on your income while tax-deductible reduces your taxable income. Keep in mind, if you own the policy and charity is the beneficiary, then you might not get a tax credit, not at least in your lifetime. This is because your estate might get tax credit after the charity receives a death benefit.

Taxation on Life Insurance Premiums for Employers

As an employer, things might be a little different for you if you pay the life insurance premiums of your employees. You will not directly receive a tax-deductible for this, but if the premiums are added to the expenses, then these expenses might be deductible. Here are a few things to note:

  • If you are paying the premiums for the group life insurance of your employees, you can deduct this cost as your business expense on the income statement. However, this will not be applicable to the cost of term group insurance or the optional dependent life insurance.
  • If you pay regular premiums and the rate of premium doesn’t differ as per the gender or age of the employee, then you can deduce the premium’s entire cost as a business expense. Furthermore, all sales and excise taxes related to the coverage will also be deductible. But if you do not pay regular premiums or if they vary as per gender or age, then you cannot have the entire cost as deductible. You will have to talk to the Canada Revenue Agency (CRA) about this.

Lastly, at the end of every year, you will have to make a T4 slip for each employee that will have details like the total amount paid, benefits your employees received, and taxes remitted by you, along with other essentials. Include this amount at the bottom of the T4 slip under code 40 and send a slip copy to CRA. If insurance premiums are paid for retired employees, report these benefits on their T4A slips under code 119.

So, What Do I Do to Ensure I Don’t have to Pay Tax on My Premiums?

There are a few situations in which you might have to shell out some bucks on premium taxes. We’ve already discussed the main ones above; Prepaid Insurance and Cash Value. If you find yourself in these or any other situation where the premium is taxable, you need to get in touch with an insurance advisor before the tax starts accumulating every month and results in a penalty.

Furthermore, if you are a business owner and want to make sure your insurance policy does not get taxed, whether on the premiums or proceeds, then you need proper financial planning. You might be asked to establish a trust or consider donating to charity, which are ways to significantly reduce your insurance taxes or not even pay them. Read more here.

Parting Words

Well, that’s a wrap! Remember, there’s more to insurance taxes than what you might find on the internet. So if you don’t find what you’re looking for, always get professional help, tax matters should be handled on time, or they can result in unnecessary penalties and fees.