Universal life insurance is a type of life insurance with flexible premium payments and death benefit options. You may pay premiums into the policy and those premiums are invested into either a fixed interest account or an investment of your choice, depending on your particular policy. You also may be able to deduct your premiums in limited situations.
Types:
There are three main types of universal life insurance. Fixed universal life insurance invests your premium payments into a fixed-interest account managed by the life insurance company. Indexed universal life insurance uses a precise mix of bonds and index call options to credit your policy cash value with most of the upward movement of a stock market index without losing any money during market corrections. Finally, variable universal life insurance provides you with the opportunity to experience the full upside potential of the stock market by investing your premiums into mutual funds. You may gain or lose money with a variable universal life insurance policy. The value of your policy depends entirely on the value of the underlying mutual funds.
Individual Policy:
An individual universal life insurance policy does not allow any deduction on premium payments. Your individual policy provides individual life insurance coverage not associated with any business expenses. Therefore, IRS does not allow tax write-offs for these personal policies.
Group Policy:
A group universal life insurance policy allows you to pay for your life insurance premiums using pre-tax dollars as long as the premiums do not exceed the amount required to support $50,000 worth of death benefits. This limited deduction allows you to purchase more life insurance than you otherwise would be able to if you did not have a deduction on your premium payments.
Executive Bonus:
An executive bonus plan is a bonus that your employer pays to you. This is considered a fringe benefit, and you own the life insurance policy as an employee. While there is no tax deduction for you as an employee, if you are the owner of a small business, you may deduct the full amount of the premium paid to the life insurance policy. As an employee, you will be responsible for paying income tax on the amount paid to the policy by the company. However, the company may issue a second bonus to pay for the taxes on the first and second bonus and write off both bonuses as a business expense.