Life Insurance in an IRS Financial Analysis: Term, Whole Life and Settlements

Life insurance shows up on a lot of financial statements, and it is often listed in the wrong place. Taxpayers put a whole life premium on the expense side and forget the cash value on the asset side. The IRS looks at it the other way around.

Two different treatments

IRM 5.15.1.27 sets the framework: "Life insurance as an investment is not considered a necessary expense. However, reasonable premiums for term life policies may be allowed when the policy is for the life of the taxpayer." And: "Whole life policies should be reviewed as an asset for borrowing against or liquidating."

The expense table in IRM 5.15.1.11 says the same thing from the other direction. Life insurance is a necessary expense "If it is a term policy on the life of the taxpayer only." If there are whole life policies, "these should be reviewed as an asset for borrowing against or liquidating."

Where it goes on the forms

On Form 433-A (Rev. 6-2026), the term life premium goes on line 45, Life Insurance. Policies with cash value go on lines 17a through 17f: the insurance company, policy numbers, the owner, the current cash value, the outstanding loan balance, and the available cash.

Form 433-F splits it the same way. Section H, box 5, lists "Term Life Insurance." The instructions say: "Enter the amount you pay for term life insurance only. Whole life insurance has cash value and should be listed in Section C."

Term premiums: what is allowed

A reasonable term policy on your own life is allowed. The logic is protecting dependents if you die. Policies on other people's lives, such as a spouse or parent, are not described as allowable in the IRM table. If you carry term coverage on a non-liable spouse and believe it is necessary, explain why.

"Reasonable" is doing work here. A modest policy sized to replace income for minor children reads as necessary. A very large policy with a large premium, held by a single person with no dependents, invites a question.

Whole life: how the IRS values it

IRM 5.15.1.27 gives two valuation rules:

• If you will cash out the policy and apply the proceeds to the tax, equity is the cash surrender value.
• If you will borrow on the policy, equity is the cash loan value less any prior policy loans or automatic premium loans required to keep the contract in force.

The IRM also notes that taxpayers can own whole life policies, with cash value, on the lives of other people. Those count too.

A policy with $12,000 of cash value is $12,000 of potential payment in the IRS's eyes, minus any existing loans. In a hardship case, that can be the difference between CNC and a request to borrow against the policy first.

Life settlements and viatical settlements

This is a newer section of the IRM, and it surprises people. IRM 5.15.1.27 recognizes that a taxpayer may be able to sell a policy to a third party who takes over the premiums and becomes the beneficiary. That changes the value, and the IRM says "all types of policies (term, whole life, universal life, etc.) may be eligible."

The IRM describes two kinds of sales:

The IRM adds that "In general, a policy may be marketable if the taxpayer is at least 65 years old or terminally ill and the policy has a face value in excess of $100k." Value depends on age, health, face value and remaining term.

When a policy could satisfy the liability or generate a substantial payment if sold, the IRM says revenue officers "should consider its potential value when evaluating collection alternatives" and may refer the taxpayer to a settlement provider for an estimate.

The protection built into the rule

The same section contains an important limit. Revenue officers "must remember the intended purpose of the policy as being necessary to meet the future needs of the taxpayer's beneficiaries and take into account any potential hardship that may result if the policy was sold."

That sentence is your argument when a policy exists to protect a disabled child, a dependent spouse, or a family that would be left with nothing. Document who the beneficiaries are, why they depend on the policy, and what would happen without it. Combine that with the hardship regulation's direction to consider "number of dependents" and "any extraordinary circumstances," and you have a principled reason the policy should stay in place.

Terminal illness

For a terminally ill taxpayer, two parts of the IRM point in different directions. On one hand, a viatical settlement may have real value. On the other, the CNC exception procedures in IRM 5.16.1.2.9 and IRM 5.19.17.2.4.1 allow small balance accounts to be reported CNC without a financial statement when the taxpayer has a terminal illness or excessive medical bills. And the beneficiary protection above carries its greatest weight when the insured is dying.

These are sensitive cases. They call for care, documentation, and a clear statement of what the policy means to the family.

Policy loans you already took

Many whole life owners have already borrowed against their policies, sometimes to pay the very taxes now in collection. The IRM subtracts "any prior policy loans or automatic premium loans required to keep the contract in force" from the loan value. A policy with a large cash value but an equally large loan may have little or no equity left.

Get the insurer's statement showing both numbers. And if you took a policy loan to pay the IRS, remember that IRM 5.15.1.11 allows repayment of loans made to pay federal taxes when the IRS received the proceeds and the loan is documented.

Employer group coverage

Group term coverage through an employer is usually cheap and often deducted from your paycheck. It is still a term policy, and a reasonable premium for coverage on your own life is an allowable expense. Make sure the deduction shows up on your pay stub and on the expense line, and that you are reporting gross pay so the deduction is not hidden inside a net figure.

Annuities are not life insurance

Insurance companies also sell annuities, and taxpayers sometimes list them under life insurance. For collection purposes, an annuity is an investment or retirement asset, valued by what can be withdrawn or what it pays out. List it in the investments section with the contract terms and any surrender charges, which reduce what you could actually get.

Practical steps

• Get a current in-force illustration or statement from each insurer showing cash surrender value, loan value, and outstanding loans.
• Move whole life premiums off your expense list. The IRS will not allow them as a living expense.
• Keep term coverage on your own life if you have dependents, and keep it reasonable.
• If you are 65 or older or seriously ill and have a large policy, expect the settlement question and be ready to discuss beneficiaries.

Life insurance is supposed to protect your family. Make sure the way you report it protects your hardship case, too.