Fact No. 1: The premium that you pay on your personal life insurance is your personal expense and cannot be deducted. IRS regulations clearly state: “premiums paid for life insurance by the insured are not deductible.” It does not matter that the premium was paid by the insured by some other person.

Fact No. 2: If you earn raise in interest rates on prepaid life insurance then it is a taxable income

Any increment that you get in the value of your prepaid life insurance or allowance premium consists of taxable income in that particular year and is applicable to the payment of the premium or is applied at the time of withdrawal, whichever situation comes first. The interest is considered as taxable income but will be included in the cost basis of the contract. Therefore IRC Section 72 states that cost of contract will be amount of premium paid excluding the discounts.

Fact No. 3:  The amount given to the beneficiary will not be taxed in case of the insured person’s death

The money distributed to the beneficiaries are not taxed, it is considered a tax free income. If the proceeds are retained by the trust then it this is considered as normal taxable income for the trust.

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