Why Premiums Aren’t Deductible—And Why That Matters

• Non-Deductible Premiums:
• If you or your business is the beneficiary, IRS rules bar you from deducting life insurance premiums (including key-person coverage and buy-sell policies).
• Trade-off: Premiums paid with after-tax dollars, but the death benefit passes to your heirs or business tax-free.

Rather than seeing non-deductibility as a drawback, many high earners view it as an investment: you’re buying a future tax-free payout and a vehicle for uninterrupted cash-value growth.

Cash Value Life Insurance: Unlimited Tax-Deferred Growth

Cash value policies—whole life or universal life—blend insurance with a savings component:

1. Tax-Deferred Accumulation

• Your policy’s cash value grows shielded from annual income tax, similar to a retirement account—but without statutory contribution caps (subject to insurer and IRS “excess benefits” guidelines).

1. Tax-Free Access

• Policy Loans: Borrow against cash value; loans aren’t taxed as income so long as the policy remains in force.
• Withdrawals: You can take out up to your total premiums paid (your basis) tax-free.

1. Income-Tax-Free Death Benefit

• Provides a legacy or business-succession tool, passing to beneficiaries without income tax.

Tip: Known as a Life Insurance Retirement Plan (LIRP) or “Insurance as an Asset Class,” this strategy shines once you’ve exhausted other tax shelters and have the time horizon to absorb policy fees and surrender schedules.

Executive Bonus Plans (IRC §162): A Corporate Funding Strategy

For owner-employees of C-corporations, the Executive Bonus Plan lets the company fund your policy:

• Mechanism: The C-corp pays the policy premium as a salary bonus.
• Corporate Deduction: Under IRC §162, the bonus is deductible as compensation.
• Personal Tax: You include the bonus in your W-2 wages and pay ordinary income tax—yet you’ve effectively funded your policy with corporate dollars.

This structure bridges the gap between non-deductible premiums and corporate deductions, fueling your cash value while adhering to tax rules.

The One Big Beautiful Bill Act (OBBBA) & Life Insurance Strategies

Enacted July 3, 2025, the OBBBA reshaped tax law—yet left life insurance planning largely intact:

1. Continued Premium Non-Deductibility: The Act did not introduce new premium deductions.
2. Unchanged Tax-Deferred Growth & Death Benefits: Cash values still grow tax-deferred, and death proceeds remain income-tax-free.
3. Enduring Executive Bonus Deductions: IRC §162 bonus mechanics still apply.
4. Heightened IRS Scrutiny: With the OBBBA’s broad scope, expect more rigorous audits of sophisticated strategies like LIRPs and bonus plans.

Pros, Cons & Best Practices

• Pros:
• Unlimited tax-deferred growth
• Tax-free policy loans and withdrawals up to basis
• Income-tax-free death benefit
• Corporate funding via bonus plans
• Cons:
• Premiums paid with after-tax dollars
• Policy costs: commissions, mortality, and administrative fees
• Potential surrender charges and capital lock-in

Best Practices:

1. Run a Cost-Benefit Analysis: Compare net returns vs. alternative investments.
2. Design with Experts: Collaborate with a financial planner to structure premiums, death benefits, and loan provisions.
3. Coordinate Advisors: Align your financial advisor (for investment and policy design) and tax advisor (for entity-level planning and compliance).
4. Maintain Documentation: Keep policy illustrations, bonus-plan agreements, and loan/withdrawal records to withstand audit scrutiny.

Key Takeaways

• After-Tax Premiums, Tax-Free Outcome: You fund policies with post-tax dollars, but cash value growth and death benefits enjoy significant tax advantages.
• No Statutory Contribution Limits: Unlike retirement accounts, cash value life policies offer virtually unlimited funding (within policy and IRS rules).
• Tax-Free Liquidity: Loans and withdrawals up to basis provide flexible, tax-efficient access to your funds.
• Corporate Funding Path: C-corp executive bonus plans allow your business to deduct premiums as compensation.
• OBBBA Preservation: The One Big Beautiful Bill Act left life insurance provisions intact but heightened audit focus on these advanced strategies.

Next Step: If you’re a high-earning entrepreneur seeking to extend your tax-advantaged growth beyond traditional retirement plans, consult your financial and tax advisors about integrating cash value life insurance into your long-term wealth and legacy strategy.