Life Insurance Paid for by a C Corporation: Tax Deductibility Explained

When a C corporation pays life insurance premiums for an executive or shareholder, the deductibility of those premiums depends on who owns the policy, who is the beneficiary, and how the arrangement is structured for tax and compensation purposes. In general, premiums paid by a C corporation on policies insuring a key employee or shareholder are not tax-deductible to the corporation if the corporation is the beneficiary, because the death benefit is tax-free to the recipient and the IRS treats the premiums as a non-deductible personal expense. If the corporation owns the policy but is not the beneficiary, or if it is a bonus or compensation plan meeting specific tests, partial deductibility may be allowed under limited circumstances. The following sections clarify the primary rules, exceptions, and planning considerations for C corporation-paid life insurance.