Is Key Person Insurance Tax Deductible?
No — Key person life insurance premiums are not deductible when the business is the beneficiary of the policy.
Quick Answer: ❌ No — Key person life insurance premiums are not deductible when the business is the beneficiary of the policy.
The Short Answer
Key person (or "key man") insurance premiums are not tax deductible. The IRS treats this as a cost of carrying insurance where the business is the beneficiary, and since the death benefit proceeds would be received tax-free, the premiums cannot be deducted. This is one of the clearest non-deductible insurance categories in the tax code.
IRS Rules for Deducting Key Person Insurance
Under IRC Section 264(a)(1), no deduction is allowed for premiums paid on a life insurance policy if the taxpayer (the business) is directly or indirectly a beneficiary of the policy. IRS Publication 535 (Business Expenses) explicitly states: "You can't deduct premiums on a life insurance policy for yourself or any other person with a financial interest in your business if you're directly or indirectly a beneficiary of the policy." This applies regardless of how critical the insured person is to business operations.
How Much Can You Deduct?
| Component | Deductible? |
| ----------- | ------------- |
| Life insurance premiums (business is beneficiary) | ❌ $0 |
| Death benefit received | ✅ Tax-free (IRC §101) |
| Disability rider premiums | ❌ $0 |
| Cash value buildup | Not taxable until withdrawn |
The trade-off is straightforward: you can't deduct the premiums, but if the key person dies, the business receives the death benefit completely tax-free.
How to Categorize in QuickBooks
- QBO Category: Other Business Expenses (non-deductible)
- Schedule C Line: Not deductible — do not include on Schedule C
- Tip: Create a sub-account called "Non-Deductible Insurance" under your insurance expense account. This keeps the expense tracked in your books without accidentally including it in deductible expenses at tax time.
Common Mistakes to Avoid
- Deducting the premiums as a regular insurance expense. This is the #1 mistake — many business owners assume all business insurance is deductible. Key person life insurance is not.
- Confusing key person insurance with employer-paid group life insurance. Group term life up to $50,000 per employee IS deductible (IRC §79). Key person coverage where the business is the beneficiary is not.
- Failing to track cash surrender value separately. If the policy builds cash value, that's a balance sheet asset, not an expense. It needs to be recorded as an asset, not lumped into insurance expense.
Record-Keeping Requirements
Maintain copies of the insurance policy, annual premium notices, and proof of payment. Keep documentation identifying the insured key person and the business rationale for the coverage amount. Even though premiums aren't deductible, you need records for your balance sheet (cash value tracking) and to substantiate tax-free treatment of any death benefit received. Retain for the life of the policy plus 3 years.
Who Can Deduct Key Person Insurance?
No business entity type can deduct key person life insurance premiums when the business is the beneficiary:
- Sole proprietors: Not deductible
- LLCs: Not deductible
- S-Corps: Not deductible
- C-Corps: Not deductible (IRC §264 applies to all entity types)
- Nonprofits: Generally should not carry key person insurance where the nonprofit is the beneficiary, but some do for key executives — still not deductible
Related Deductions
> Behind on your bookkeeping? Ketchup catches up your QuickBooks in 3–7 business days — starting at $69/month of catch-up. Get your price →
Related Tax Deductions
Missing deductions because your books are behind?
Accounting Ketchup catches up your QuickBooks so every deduction is properly categorized. Flat rate. No surprises.