Tax Deductibility Of Insurance Premiums

General tax rule: if the premiums are not tax deductible, then the benefits are tax-free (and vice versa)

Learn about the taxation of insurance.

Life Insurance

  • premiums for individual life insurance are not tax deductible → death benefit is tax-free
    • regardless of whether ownership is personal or corporate


Life insurance premiums are only tax deductible when the policy is

  1. assigned as collateral for a loan
  2. donated to a registered charity
  3. part of an RRSP

Collateral Life Insurance

  • the lender requires insurance as a condition of granting a loan (collateral assignment)
  • can deduct min{NCPI, actual premium} related to the current loan balance
    • deduction decreases as loan principal decreases
  • if the life insured dies
    1. the tax-free death benefit goes to the lender to payoff the outstanding loan
    2. any remainder goes to the beneficiary specified by the policyowner

Charitable Life Insurance

  • insurance policy is absolutely assigned to a registered charity (which then becomes the policyowner and beneficiary)
  • different methods
    • donating the premiums
      • premiums paid qualify for a nonrefundable charitable tax credit
      • death benefit → charity tax-free
    • donating the death benefit
      • at death, nonrefundable charitable tax credit for the death benefit
      • death benefit → charity tax-free


Registered Life Insurance

  • policyowner registers the cash surrender value as an RRSP
  • gets tax deduction for the portion of the premium which goes to the cash surrender value
    • no deduction for the portion of the premium used for the life insurance charges
  • cash surrender value taken while alive is fully taxed as interest income
  • at death of the insured, the insurance portion goes to the beneficiary tax-free and the cash surrender value portion is taxed as any other RRSP
  • usual RRSP rules apply to the registered cash surrender value (e.g., over contributions, maturity options, etc.)

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