It is a common misconception that key person insurance is tax deductible. If you have a key person insurance policy, you are not allowed to deduct the cost of the premium from your federal income tax. According to IRS regulations in section 1.264-1, you cannot deduct the cost of life insurance for you, an employee, or any individual with a financial interest in your company, if you are the beneficiary on the policy. Life insurance premiums are not considered to be a necessary or ordinary business expense and so must be paid for out-of-pocket.