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Have you ever wondered if your critical illness insurance premiums are tax-deductible? This question can be a real head-scratcher during tax season, and the answer could significantly impact your finances.
In this post, we will unravel the intricacies of critical illness insurance premium deductions. We’ll explore the rules and regulations surrounding this topic, helping you gain a clear understanding of how it may affect your tax situation. By the end, you’ll be equipped with the knowledge to make informed decisions and potentially reduce your tax burden.
Keep reading to discover the insights that could save you money and provide peace of mind in the event of a serious illness.
What Is Critical Illness Insurance?
Critical illness insurance provides financial assistance in the event you are diagnosed with an illness covered in the policy. It is designed to help you manage the high costs of treating and recovering from a severe illness.
Upon being diagnosed with a covered critical illness, the insurance company pays you a tax-free lump sum benefit. While you can use the critical illness insurance payout at your discretion, most people use it to fund medical expenses, pay for rehabilitation, settle debts, replace lost income, or make necessary lifestyle adjustments during recovery.
Critical illness insurance policies typically cover a predefined list of 25 serious illnesses, such as cancer, heart attack, stroke, major organ transplant, and kidney failure. The specific conditions covered vary between insurance providers.
Can You Claim Critical Illness Insurance Premiums On Your Taxes?
Did you know there are several ways for you to obtain critical illness insurance coverage? You can get it as an employee benefit through your work, buy it as a personal living benefits policy, or have your corporation own the policy.
What is the tax treatment of your premiums under the Income Tax Act? Let’s take a look at each method below.
Are individual critical illness insurance premiums tax-deductible?
While you can buy critical illness insurance through your corporation, the most common type of ownership is a personally owned critical illness insurance policy. This is also known as individual critical illness insurance because the coverage did not come from a group like an employer-sponsored plan.
Because premium payments are considered personal living expenses paid with after-tax dollars, they are not tax-deductible. This mirrors the tax treatment of premiums for individually owned life and disability insurance policies.
Also, unlike a private health services plan, premiums paid for critical illness insurance do not qualify for the medical expense tax credit.
Can you deduct the critical illness insurance premiums as a business expense if you are self-employed?
Although self-employed individuals and small business owners have many tax-deductible business expenses, the premiums paid for critical illness insurance are not one of them.
That’s because a critical illness insurance policy is not an expense you incur to earn income from your business activities. Therefore, you cannot deduct the premiums for critical illness insurance on your taxes.
What if you name yourself as the beneficiary on a corporate-owned disability policy?
If you are an incorporated small business owner, can you buy a critical illness insurance policy with your corporation and name yourself as a beneficiary? Certainly, but we would advise against it.
That’s because the Income Tax Act considers this a shareholder benefit, which is not tax-deductible for your corporation. On top of that, the premiums paid are considered taxable income to yourself.
Instead, you should name your corporation as the beneficiary of corporate-owned insurance to avoid adverse tax consequences. The insurance company will pay your corporation the lump sum benefit if you suffer a serious illness. You can use it to pay off debts or keep the business operational while you recover from your life-altering illness.
Can a corporation claim group critical illness insurance premiums as a tax deduction?
Companies often provide employment benefits as a perk to improve employee satisfaction and morale. A group insurance plan can also give an organization a competitive advantage in attracting and retaining talent.
Most group benefits packages contain extended health insurance, which helps pay for hospital or medical expenses not covered by your provincial health insurance. These plans also commonly provide disability insurance to replace your income and life insurance to protect your family.
However, group critical illness insurance isn’t as prevalent as other coverages. One reason it’s overlooked is because it hasn’t been available for as long as life or disability insurance. Therefore, not as many people know about critical illness insurance benefits, and fewer group benefits advisors promote it.
For those companies that offer critical illness insurance, are the employer-paid premiums a deductible expense? In this case, premium payments are considered eligible expenses and qualify for tax deductions.
For the individual employee, the premium paid is included in their income, so it’s a taxable employment benefit.
Can you deduct other types of insurance premiums?
Besides critical illness insurance, you can get other insurance policies to protect yourself. These include life, disability, and health insurance. Let’s briefly explore each to see if the premiums are tax-deductible.
Life insurance
You can use life insurance to:
- Protect your family
- Cover a loan
- Pay for final expenses
- For charitable giving
- As a tax-sheltered investment
And much more. Generally, life insurance premiums are not a tax-deductible expense. The only exception is if you use your life insurance policy as collateral for a loan.
Even if they are, only a certain portion may be eligible for deductions. The Income Tax Act has specific rules to prevent taxpayers from making inaccurate deductions. Thus, it’s crucial to be cautious when claiming deductions for life insurance premiums.
Disability insurance
Similarly, only certain types of disability insurance premiums are tax-deductible. Income replacement products cannot be deducted, while policies that reimburse your overhead expenses generally can be deducted by your business.
Health insurance
A private health services plan reimburses you for dental and medical expenses, like prescription drugs, eyeglasses, or a visit to a physiotherapist.
Although individual health insurance premiums are not tax-deductible, they qualify for the medical expense tax credit. Because these plans often cost hundreds if not thousands of dollars, this can provide you with some financial relief when tax season arrives.
Frequently Asked Questions
Are critical illness insurance premiums tax-deductible?
In general, you cannot deduct the premiums for a critical illness insurance policy on your tax return. This includes a personally owned policy and one you hold inside your corporation.
Are critical illness insurance premiums considered taxable income?
If an employer pays for the perk, the premiums are a taxable benefit to the employee. This means the employee has to include the premium when filing their taxes.
Is the lump sum payment for critical illness insurance taxable?
Like other types of individual insurance policies like life and disability insurance, insurance companies pay out the lump sum benefits of critical illness policies tax-free.
Is Critical Illness Insurance Tax-Deductible?
As you can see, critical illness insurance premiums are not tax-deductible for the most part. However, there is still a preferential tax treatment in that the lump sum payment is received tax-free.
Whether it’s life, disability, or critical illness insurance, you should always consult a tax professional before applying any tax deductions.
As insurance advisors, we strive to identify your critical illness and disability insurance needs. We work with the best insurance providers to find a plan that fits your needs and budget, so you have peace of mind knowing you’re covered in case a critical illness arises.
Contact us for a free, no-obligation critical illness insurance quote at info@briansoinsurance.com or 604-928-1628. You can also use the form below to receive a quote straight to your inbox.
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While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
