Are Life Insurance Premiums Ever Tax Deductible?

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:

  1. 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.
  2. 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.


If all of the above criteria are met the borrower is entitled to a collateral insurance deduction which is the lesser of the premium paid or the Net Cost of Pure Insurance (NCPI).  NCPI is calculated from factors contained in the Income Tax Act and is applied against the net amount at risk of the insurance policy.  It increases annually and is also used to determine the Adjusted Cost Basis (ACB) of the policy.

For example, let’s consider John, a 45-year-old non-smoker who wishes to purchase shares in his employer’s company.  His bank will lend him the money against the collateral of those shares if he will also assign a life insurance policy on his life in the amount of the loan.  John purchases a 10-year term insurance policy in the amount of $1,000,000 (the amount of the loan) which he assigns to the bank.  The annual premium for this policy is $1,010 and the NCPI is $820.  In this example, John would be entitled to a collateral insurance deduction for $820.

As of January 1, 2017, NCPI now recognizes insureds who are rated as a substandard risk for life insurance.  Prior to this date, the NCPI did not take into consideration the additional premium resulting from a substandard risk.  If we assume that John was rated 200% for health reasons his annual premium for the policy would increase to $1,970. If the policy was issued after January 1, 2017 his NCPI (and collateral insurance deduction) would now increase to $1,640.  For policies issued before this date the deduction would be the same as if John were a standard risk.

Where the owner is a business 

Canadian private corporations are also able to claim the collateral insurance deduction on policies they own on the life of a shareholder or key person that is assigned to a lending institution as a condition of a loan for either investment or business purposes.  This can also have the added advantage of the proceeds of the life insurance policies creating a Capital Dividend Account (CDA) which can be paid tax free to shareholders of the corporation.

For example, if John, in the previous example, were a shareholder of his company and the bank required $1,000,000 of coverage to facilitate a loan which the company was going to use for expansion, the company would be entitled to deduct the NCPI (or premium paid, if the lesser) from business income.  Should John die and the $1,000,000 of insurance proceeds were paid to the bank to repay the loan, the company would still be entitled to credit the death benefit less the ACB of the policy to the Capital Dividend Account even though the company retained none of the proceeds.  As a result, retained or future earnings could be paid to the surviving shareholders tax free up to the amount of the CDA balance.

Life insurance policies donated to a charity 

Gifting a life insurance policy results in a charitable tax credit based on the value of the policy at the time of the gift.  This usually means cash surrender value.  Premiums paid for the policy receive the charitable tax credit when those premiums continue to be paid by the donor on behalf of the charity that now owns the policy. 

For policies that only have the charity named as a beneficiary there is no immediate deduction. When the insured dies, however, the death benefit is considered to have been immediately donated before the donor’s death. A tax credit is available on the insured person’s final return for the year of death and for the year before death.

Generally, life insurance premiums are not tax deductible.  These are two situations that they may be deductible if structured properly.  It is always advisable to seek the advice of a qualified advisor when dealing with income tax related issues.

As always, please feel free to share this information with anyone that may benefit from it.

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This information is designed to educate and inform you of financial strategies and products currently available. As each individual’s circumstances differ, it is important to review the suitability of these concepts for your particular needs with a Qualified Financial Advisor.