No. When a business owns a life insurance policy and is its beneficiary, Section 264(a)(1) of the tax code bars a deduction for the premiums. The trade-off is that the death benefit is generally received income-tax-free under Section 101(a), as long as the business followed the Section 101(j) notice and consent rules before the policy was issued. A deduction now in exchange for a taxable payout later would usually be a worse deal.
We are licensed insurance brokers, not CPAs or attorneys. Treat the tax and legal points on this page as general education, and confirm them with your own CPA or attorney before acting.
On this page
The rule in plain English
Section 264(a)(1) says a taxpayer cannot deduct premiums on a life insurance policy covering an officer, employee or anyone financially interested in the business when the taxpayer is directly or indirectly a beneficiary. Key person insurance is the textbook case: the business pays, the business collects. So the premium is paid with after-tax dollars.
The logic is symmetry. Because the death benefit is generally tax-free when it arrives, the tax code does not also give a deduction on the way in. Owners sometimes look for a way around it, but the structures that make premiums deductible usually make the benefit taxable or put it in the wrong hands.
How it compares to other business policies
| Arrangement | Premium deductible? | Death benefit |
|---|---|---|
| Key person (business owns and is beneficiary) | No | Generally tax-free to the business if 101(j) was followed |
| Entity-owned buy-sell policy | No | Generally tax-free to the business; counts toward company value (Connelly) |
| Cross-purchase buy-sell (owners own policies on each other) | No (owners pay personally) | Generally tax-free to the surviving owner |
| Section 162 executive bonus (employee owns policy) | Yes, as compensation | Generally tax-free to the employee's family |
| Group term life for employees | Yes | Generally tax-free to the employee's family |
The pattern: when the business benefits, there is no deduction. When the employee's family benefits, the business deducts the cost as compensation and the employee is taxed on it (except for the first $50,000 of group term life).
Keeping the death benefit tax-free
Since 2006, employer-owned life insurance has an extra hurdle. For policies issued after August 17, 2006, the death benefit above the premiums paid is taxable to the business unless:
- Before the policy is issued, the employee gets written notice that the business intends to insure them and the maximum face amount, that the business will be the beneficiary, and signs a written consent (including consent for coverage to continue after they leave); and
- An exception applies: the insured was an employee within 12 months of death, or was a director or highly compensated employee when the policy was issued, or the proceeds go to the insured's family or estate or are used to buy the insured's ownership interest from them.
Most key people are highly compensated, so the exception usually fits. The paperwork is what gets missed. Our 101(j) notice and consent guide has a checklist you can hand to your CPA, and the business must also file Form 8925 each year.
A note for C corporations and larger estates
A tax-free death benefit can still have tax effects. Proceeds a corporation receives increase the company's value. For an owner-insured, that can raise the value of their shares in their estate, which is exactly what happened in the Connelly case. For most closely held businesses under the current $15 million exemption this will not create estate tax, but it matters for larger estates and for any buy-sell priced off the company's value. See After Connelly.
What about key person disability?
The same logic applies. When the business owns a key person disability policy and receives the benefits, premiums are generally not deductible and benefits are generally received tax-free. Business overhead expense insurance works the opposite way: premiums are generally deductible and benefits are taxable income, because the benefit reimburses deductible expenses. Details in key person disability and overhead expense coverage.
The bottom line
Treat key person premiums as an after-tax cost and budget for them that way. Term coverage keeps that cost low. Get the 101(j) consent signed before the policy is issued, file Form 8925 every year, and the payout should arrive tax-free when the business needs it most. Use the key person calculator to size it.
Frequently asked questions
Can I deduct key person insurance if I make my family the beneficiary?
If the policy benefits your family instead of the business, it is no longer key person insurance. A business paying for coverage that benefits an employee or owner's family is generally treated as compensation: deductible to the business if reasonable, and taxable income to the insured. That is the Section 162 bonus approach, and it does nothing to protect the business.
Are key person premiums deductible for an S corporation or LLC?
No. Section 264 applies to every type of business. Pass-through entities cannot deduct the premiums either, and nondeductible premiums reduce the owners' basis.
Do I report key person insurance on my tax return?
The premiums are not deducted, but a business that owns employer-owned life insurance files Form 8925 each year with its return, reporting the number of insured employees and whether valid consent exists for each.
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Written by Erik Moran
Erik co-owns Moran Insurance Group with Amanda Moran and handles the agency's life insurance cases, from key person and buy-sell coverage to trust-owned policies. He works alongside clients' CPAs and attorneys, who make the tax and legal calls. More about Erik.
Sources
Moran Insurance Group is a licensed insurance agency. Our brokers are not CPAs, attorneys or tax advisors, and nothing on this page is tax, legal or investment advice. Tax figures and rules reflect our understanding as of October 2026 and can change. Coverage is subject to carrier underwriting and state availability. Confirm anything tax or legal with a licensed CPA or attorney before you act on it.