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Premium taxes and the DAC tax: the taxes inside your premium
States tax insurers on premiums collected, and the federal DAC tax delays their deductions. How both feed into what you pay, with dated rates.
Two taxes are priced into most life insurance premiums even though neither appears as a line on your bill. States charge insurers a premium tax on the premiums they collect, commonly around 2%, and federal law (the "DAC tax" in Internal Revenue Code section 848) makes insurers defer part of their deduction for the cost of selling a policy. Both are costs of doing business that insurers fold into prices, along with commissions and underwriting.
State premium taxes
Every state taxes insurers on premiums, often in place of, or alongside, the income taxes other companies pay. The insurer, not the policyholder, pays the tax. It is one component of the expense block described in how life insurance premiums are calculated, and in many states the rate is a percentage of the premiums an insurer receives from policyholders in that state.
The National Association of Insurance Commissioners publishes a chart, State Insurance Charts: Premium Tax Rate by Line (December 2025), that lists each state's rates. The rates for life insurance differ across states. Examples from that chart:
| State | Rate on insurers generally or life, per the NAIC chart |
|---|---|
| Alaska | 2.7% for life on individual policy premium up to $100,000 per policy |
| Alabama | 2.3% for life (some small life premiums taxed at lower rates) |
| California | 2.35% (insurers generally) |
| Colorado | 2% (1% for insurers with a Colorado home or regional office) |
| Florida | 1.75% (insurers generally) |
| Georgia | 2.25% (insurers generally) |
| Hawaii | 2.75% for life |
| Illinois | 0.5% (insurers subject to income tax, privilege tax and retaliatory tax) |
For Texas, the Texas Comptroller lists 1.75% for life, accident and health insurers, with a half rate of 0.875% on the first $450,000 of life insurance premium. The chart notes it is a snapshot with caveats: special rates for certain products, credits, and surcharges are not all reflected.
Several points follow from the data:
- "Around 2%" is the right order of magnitude, but rates in the chart run from well under 1% in some cases to over 2.5% in others, and rules differ for annuities (many states charge nothing on annuity premiums) and for corporate- and trust-owned policies.
- Insurers selling nationally pay many states' rates, generally based on where the policy is sold, not only the insurer's home state.
- A 2% premium tax is not a 2% surcharge on your bill. It is a cost to the insurer, which prices it with its other costs. Competition, not a separate line item, determines how much of it ends up in the premium for a given policy.
- State guaranty association assessments are a separate cost that arises when an insurer fails; see state guaranty association coverage lookup.
For a state's life insurance rules, see its guide, for example California, Texas or Florida.
A hypothetical example
Say an insurer collects $1,000 in premium on a policy in a state with a 2% premium tax. The tax is $20, paid by the insurer to the state. That $20 is one of the costs behind the premium, like part of the commission or the underwriting expense. If it would cost the insurer $20 less in a state without the tax, competition may or may not pass that on. This is an invented figure, not a price from any company.
The federal DAC tax
"DAC" stands for deferred acquisition costs. A life insurer spends heavily to sell a policy: commissions, underwriting, issue costs. Ordinary business accounting would let a company deduct such costs when it pays them. For life insurers, IRC section 848 requires something different. It treats a fixed percentage of each year's net premiums as "specified policy acquisition expenses" that must be capitalized, meaning the insurer cannot deduct all of it that year. Instead it deducts it gradually.
According to the text of 26 U.S.C. section 848 as currently in force:
- The percentages of net premiums are 2.09% for annuity contracts, 2.45% for group life insurance contracts and 9.2% for other specified contracts, which includes most individual life insurance.
- The capitalized amount is deducted ratably over 180 months, beginning with the first month in the second half of the taxable year.
The 2017 tax law (the Tax Cuts and Jobs Act) lengthened the deduction period from 120 to 180 months and raised the percentages from earlier levels (7.7% for most individual life), according to the Society of Actuaries' tax newsletter and the statute. The change lengthened the time before an insurer recovers the tax benefit of its expenses.
What it costs
The DAC tax is a timing rule, not a new tax rate. The insurer pays tax today on income it could have sheltered with a deduction and recovers the deduction over the following 15 years. The cost to the insurer is the time value of that delay, and it applies to the part of a premium treated as capitalized. Say an insurer has $1,000,000 of net premium on individual life contracts in a year. Under the 9.2% percentage, $92,000 is capitalized for that year and deducted over 180 months instead of being deducted at once. This is arithmetic from the statute, not an estimate of any company's cost or price effect.
Insurers and trade groups have argued that the cost is real and is passed into pricing, especially for products with thin margins. Whether and how much it affects a given premium depends on the insurer's tax position and its pricing, and the companies do not publish it. We can therefore say that the DAC rule adds to insurers' costs of selling life insurance, but not by how much on your policy.
What you can do about it
You cannot choose to avoid either tax, but you can understand where they sit among the costs you can control.
- Compare total prices, not the components. Taxes are the same for everyone buying the same policy in your state; differences between quotes come from underwriting, commissions, mortality and margins. See how to compare life insurance quotes fairly.
- Know the difference between taxes inside the premium and taxes on the proceeds. The death benefit is generally not taxable income to the beneficiary; see how cash value is taxed: withdrawals, loans and surrenders for taxes on cash value.
- Ask about premium taxes on annuity-type products if you are buying one, because state treatment differs. See fees and charges inside permanent life insurance for other charges in cash-value policies.
- Treat claims of "tax-free" or "no-tax" products with care, and ask a tax professional or your state insurance department about specifics.
Key takeaways
- Premium taxes are paid by the insurer, not billed to you; the NAIC's December 2025 chart shows life rates generally in a range around 1.75% to 2.75%, with exceptions.
- The tax is based on policyholder residence, so a national insurer pays different rates in different states.
- The DAC tax under IRC section 848 requires insurers to capitalize 9.2% of net premiums on most individual life contracts (2.45% group life, 2.09% annuities) and deduct it over 180 months.
- The DAC rule changes when the insurer gets a deduction, not whether, so its cost is a timing cost.
- You cannot opt out of either; compare total quotes and let competition work.