Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Tax-Free Exchange Can Erase Policy’s Tax Benefits

Posted by William Byrnes on July 18, 2011


A recent IRS Revenue Ruling provides an important reminder for us of the rules for deducting interest that’s paid or accrued on a business life insurance policy loans. Knowing how and when policy loan interest is properly deductible can mean the difference between closing the sale in the first instance and an IRS audit down line if these rules are ignored.

In general, interest paid on a life insurance policy loan is not deductible for income tax purposes; but there are some exceptions for life insurance purchased for business purposes. The deductibility of policy loan interest has changed significantly over the past 20 years, so an intimate knowledge of the specifics is imperative when selling or transacting on a policy that’s issued to a business.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous Advisor’s Journal coverage of the exception to the pro rata limitation on interest deduction, see Obama Budget Would Undercut Utility of Life Insurance in Small Business Planning (CC-11-41).

For in-depth analysis of corporate-owned life insurance, see Advisor’s Main Library: D—Deductibility Of Business Insurance Premiums, E—Premiums As Taxable Income To The Insured & F—Taxability Of Corporate Owned Life Insurance Proceeds At Death.

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