Considering that the proceeds of a life insurance policy are received tax free upon the death of the life insured, it is not surprising that the premiums of the policy are not tax deductible. There are two circumstances, however, where premiums would be deductible for income tax purposes:
- If the life insurance policy is assigned to a lending institution that requires the assignment as a condition for a loan, for either investment or business purposes.
- If the life insurance policy is donated to a registered charity and the donor continues to pay the premiums on behalf of the charity.
Life insurance policies used as collateral security for a loan
The conditions under which the owner of a life insurance policy would be entitled to a collateral insurance deduction are as follows:
- The loan advance must be made by a qualified financial institution that is in the business of lending money. This includes banks, finance companies, trust companies, credit unions or insurance companies. It does not include private lending arrangements such as with friends or family members;
- The lending institution must require the assignment of the policy owned by the borrower as a condition for granting the loan and a formal assignment of the policy must be made. There should be a letter or other documentation on file to substantiate the lender’s requirement for the life insurance assignment;
- The proceeds of the loan must be used for investment or business purposes the income of which would be taxable to the borrower;
- The life insurance policy assigned can be either an existing policy or one taken out for this specific purpose.