Ashley Lee is a Content Strategist for Best Company specializing in debt relief, tax relief, and student debt. She’s been writing and editing professionally on topics such as finance and education for just under a decade. Ashley is enthusiastic about helping consumers get the information they need to make the best decisions possible.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insur...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years Leslie Kasperowicz

UPDATED: Mar 17, 2021

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The United States is home to the biggest insurance market in the world. Most Americans use some type of insurance coverage to protect themselves against financial losses. But with Tax Day looming, you might be wondering if and how various types of insurance policies affect your tax bill.

Sometimes your insurance premiums can be deducted from your taxable income, while other times the insurance benefits you receive can add to it.

The impact on taxes depends on the type of insurance, and often how the premiums are paid. So whether you’re shopping for cheap term life insurance and want to know about future tax impact, or you’ve already got policies in place and aren’t sure what is deductible, read on to learn about each type of insurance and tax liability.

Before you read more about how your insurance policies affect your taxes, take a moment to compare free life insurance quotes. Enter your ZIP code now to get started.

What are the types of insurance and how do they affect taxes?

There are a variety of insurance policies available to consumers that can have an effect on your tax returns. Let’s take a look.

How do disability insurance and Social Security affect taxes?

Disability insurance can provide income when you’re unable to work due to disability, whether it’s short-term or long-term. Whether that income is taxed depends on where it comes from.

More than 25 percent of people who are 20 years old can expect to miss a year or more of work due to a disability before reaching retirement age.

Supplemental security income, or SSI, isn’t necessarily disability insurance, but it is one way people receive disability benefits. SSI is not taxable.

Social security benefits, which include social security disability insurance or SSDI, are taxed only if the total amount comprising one-half of your benefits plus all your other income is higher than the base amount, which varies depending on your filing status.

Base amounts based on your filing status:

  • $25,000 if you’re single, head of household, or qualifying widow(er), or if you’re married filing separately and lived apart from your spouse for the entire year.
  • $32,000 if you’re married filing jointly.
  • $0 if you’re married filing separately and lived with your spouse at any time during the year.

In addition to government disability benefits, you could also receive disability income through a private plan. If you pay the entire cost of your disability insurance premiums, you’re not taxed on the income you receive from it.

If you and your employer share the cost of your disability insurance premiums, then you’re only taxed on the portion of your income that comes from your employer’s payments.

On the other hand, if your employer pays for the entire cost of your plan, or if you deduct the cost of your disability insurance premiums, the benefits you receive through the plan are taxable.

How do life insurance premiums and benefits affect taxes?

Life insurance provides money for a chosen beneficiary – such as your children – after the insured person dies. The death benefit is often used to pay for funeral or medical expenses, pay off a mortgage, or leave an inheritance. A common example is when parents make their children beneficiaries of their life insurance.

Generally speaking, if you receive a life insurance death benefit payout as the beneficiary of a policy after the death of the insured person, the money you receive isn’t considered taxable income, according to the IRS.

The exception to this is any interest you receive from the policy. If for some reason the life insurance benefit isn’t paid out immediately but instead is held for a time by the insurance company, any interest generated during that time is taxable income.

The premiums you pay to your insurance company for your life insurance policy are not tax-deductible, but if you purchase a group life insurance policy at work they may be deducted from your paycheck pre-tax.

Up to $50,000 in life insurance can be paid for by your employer on your behalf tax-free. Any more than that may be taxable as a benefit of your job.

How does health insurance coverage impact your taxes?

Health insurance offsets the cost of medical expenses, including doctor visits and prescription medications.

In 2018, 91.5 percent of Americans had health insurance coverage for all or part of the year, according to the U.S. Census Bureau.

If you itemize your deductions on your tax return, you can deduct the medical expenses that exceed 7.5 percent of your gross adjustable income, including health insurance premiums, according to the IRS.

Another way you can lower your tax bill while paying for medical expenses is by contributing to a health savings account or flexible spending account.

People can set aside pre-tax money in a health savings account if they have a high deductible health plan, and in a flexible spending account based on availability from your employer.

The money put into those accounts can’t be used to pay for health insurance premiums, but it can be used for certain medical expenses.

Like group life insurance, health insurance premiums are deducted from your paycheck pre-tax.

Can you deduct auto insurance costs from your taxes?

Auto insurance covers damages and losses related to cars, including property damage, whether to your car or someone else’s. It also covers the cost of your or others’ injuries resulting from the use of a car.

If you only use your car for personal purposes, you won’t be able to deduct the cost of your premium. However, if you use your car for business and you deduct vehicle expenses rather than the standard mileage rate, you can deduct the cost of your car insurance premiums.

Just remember that you can only deduct the costs that come from its business use. If you use your car only for business, you can deduct all your car’s costs. On the other hand, if you only use it for business some of the time, you’ll only be able to deduct a portion of the costs.

Can you deduct homeowners insurance costs from your taxes?

Homeowners insurance covers losses related to a person’s home, including interior and exterior damage, personal property losses or damages, and injury that occurs on the property.

You can deduct the cost of your homeowners insurance if you use your home, or part of it, for business such as receiving rental income from your property.

Is mortgage insurance tax-deductible?

Not to be confused with homeowners insurance, mortgage insurance protects your lender in case you default on the loan.

Typically, you’ll need to pay for mortgage insurance if your down payment is less than 20 percent of the purchase price, or if you get an FHA or USDA loan. You can deduct the cost of your mortgage insurance if you itemize your deductions.

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What should you do if your tax bill is bigger than expected?

If you were counting on deducting the cost of a premium and you can’t or your insurance benefits end up unexpectedly adding to your taxable income, it’s possible you could end up with a higher tax bill than you expected.

If you get a tax bill you’re not able to pay, consider talking to a tax relief company. Tax relief companies can help taxpayers with solutions in offering a compromise, installment agreement, and currently not collectible status.

Don’t let taxes stop you from getting the insurance you need. Compare affordable rates for life insurance right here.