Nearly a third (29%) of American adults are considering using their tax refund to pay for insurance premiums this year. Most people reported rising insurance premiums in 2023, with Americans saying they had to cut spending on essentials and save less money as a result. So, it is no surprise that many plan to designate their upcoming influx of cash to cover these costs—which are set to continue going up in 2024.
Nearly half (48%) of Gen Z said they are considering using their refund to cover insurance premiums, compared to just 33% of millennials, 27% of Gen X and 17% of Boomers. Higher premiums likely hit the younger generation harder, since they are just starting their financial journey. Additionally, auto insurance companies tend to view young, less experienced drivers as riskier and price policies accordingly.
People who live in households with children under 18 years old were also more likely than households without children (39% vs. 26%) to say they might use their tax refund to cover insurance premiums. Hispanic (38%) and Black (35%) consumers were also more likely than others to say they are considering this.
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Consumers Use Tax Refunds to Build Financial Security
Insurance can be an important tool for building financial security. In many cases, paying your premiums upfront, such as with your tax refund, can net you savings. For example, most auto insurers offer a discount if you pay your policy in full for the policy term, since they do not incur the costs associated with installment payments. Many life insurance products also offer a discount for choosing to pay the premium annually.
Whether it’s covering insurance premiums or paying down debt, most consumers intend to use their tax refunds to build financial security this year. Of the 72% of respondents who expect to receive a refund:
- 42% plan to save some or all of their refund
- 36% plan to pay off debt
- 30% plan to catch up on monthly bills
Around 23% of consumers expecting a refund plan to use their tax refund on something “fun,” while 19% plan to invest it and 3% plan to donate it. Around 12% are undecided on how they will spend it.
Tax Benefits of Insurance: Medical Savings Accounts
Using your tax refund to pay annual premiums can help you save money on insurance, but did you know that insurance can also help you save money on your taxes? Many people don’t. According to our research, nearly half (49%) of consumers are not aware of the tax advantages of medical savings accounts, for example.
Contributions to a medical savings account through your health insurance, like a Flexible Spending Account (FSA) or Health Savings Account (HSA), are not taxed. This means you can pay for out-of-pocket medical expenses, like prescriptions, dental care, or co-pays for doctor visits, with pre-tax dollars. If you have an HSA, you can also invest your funds long-term, and the gains will also be tax-free if you spend them on future medical expenses.
According to our research, high earners were most likely to report being extremely familiar with the tax advantages of medical savings accounts, but still, only 15% of them said this. Consumers earning less than $50,000 were the most likely group to say they were not at all familiar (38%). Looking at different generations, Gen Z consumers were most likely to say they were at least somewhat familiar (53%) compared to 47% of millennials, 51% of Gen X and 47% of Baby Boomers.
Understanding your options could help you lower your taxable income significantly. In 2024, individuals can contribute up to $4,150 to an HSA and families can contribute up to $8,300, according to the IRS. That limit increases by $1,000 for those 55 and older. The contribution limits to an FSA are $3,200. It’s important to note that unlike HSA contributions, FSA contributions are “use it or lose it,” meaning you must spend the dollars during your plan year.
While FSAs are typically offered alongside employer-provided health insurance, HSAs are available to people enrolled in a high-deductible health plan. Review your policy or connect with your insurance agent to find out if you can contribute to a tax-advantaged medical savings account in 2024.
Tax Benefits of Insurance: Life Insurance
There are also several tax advantages of life insurance to be aware of if you are insured, or if you are the beneficiary of someone else’s policy. For example, if you pass away, the death benefit your beneficiary receives will not be subject to income taxes. According to the IRS, “life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren’t includable in gross income and you don’t have to report them.”
Unfortunately, not everyone is aware of this advantage. According to the survey, nearly one third (30%) of consumers believe they would owe taxes on a death benefit, and 36% were unsure.
A life insurance payout can help a family cover day-to-day expenses, or funeral and burial costs, when a loved one passes away. It’s important to find a policy that meets your unique needs and financial situation. A licensed life insurance agent can provide personalized guidance and support as you look for a policy.
Other Tax Benefits of Insurance: Home & Auto
While home and auto insurance premiums are typically not tax deductible, there are some exceptions.
- If you own property that is an investment (e.g., you rent it out to tenants) you can deduct homeowners insurance premiums. Premiums on insurance for your primary residence are not deductible.
- If you have a home office, you may be able to deduct a portion of your home or renters insurance.
- If you use your car for business-related purposes (such as gig work), you may be able to deduct a portion of your auto insurance premiums.
Additionally, if your vehicle was totaled or stolen and you filed an insurance claim, you may be able to claim a deduction for losses not reimbursed by insurance. For example, if the damage to your vehicle exceeded your policy limits, you may be able to deduct the difference.
It is important to consult with an accountant on your specific tax liabilities and the deductions available to you.
Assurance IQ’s online survey of 1,165 US adults aged 18 and up was conducted from January 26 to 29, 2024. The data were weighted to the US population by 10 demographic questions. The credibility interval for questions answered by all respondents is plus or minus 4 percentage points.