Question

Which of the following is the reason why premiums paid on personal life insurance are not deductible?

A - They are considered to produce a guaranteed source of income
B - They are considered a personal expense
C - It makes the deductibility of employer-paid premiums more attractive
D - They rarely exceed 10% of a taxpayer's AGI

Answer 1

Premiums paid on personal life insurance are not deductible because they are classified as personal expenses, not business related and therefore do not contribute to earning an income for the taxpayer. The correct option is B.

Step-by-step explanation:

The reason why premiums paid on personal life insurance are not deductible is that they are considered a personal expense. This means that, unlike business expenses that can be written off because they contribute to earning an income, life insurance premiums are paid to protect individuals and their families, which does not directly generate income for the taxpayer.

As such, they do not qualify for a tax deduction, primarily because the insurance market operates on the principle that the collected premiums will cover the costs of claims, operational expenses, and firm profits. Moreover, allowing deductions for such personal expenses could complicate the tax system and have broader implications for the balance between collected premiums and payouts.

Hence, Option B is correct.