How Does Life Insurance Affect Taxes?
People often wonder if there are any tax implications with life insurance. Questions range from, “Will my beneficiaries have to pay taxes when the death benefit of my life insurance policy is paid out to them?” to “Are my premium payments tax-deductible?” The laws and regulations surrounding life insurance and taxes are extensive, but we’ve broken down some of the main things for you to consider.
Is Life Insurance Taxable?
The answer is generally no, life insurance proceeds received as a beneficiary due to the death of the insured person are usually not taxed. Since life insurance proceeds generally are not taxable, your beneficiary should receive the full amount of the policy subject to common death benefit reductions like outstanding loans, past-due premiums, or graded death benefit limitations as specified in your policy contract. However, in the event that a beneficiary receives installments over time (not a lump-sum distribution) and those installments earn interest, there may be taxes due on the interest earned.
Can I deduct my premium payments when I file my taxes?
For most individuals and families, Life insurance premiums typically are not tax-deductible. However, tax laws can be complex and are different from state to state, so be sure to speak to a tax professional or your local tax office to get a definitive answer for your situation.
Anything Else I Should Know?
You may find yourself in a position to surrender your policy and receive the policy cash value. This payout will not be taxed as long as it is less than what you’ve paid in premiums and the policy not classified as a modified endowment contract (MEC). You can learn more about modified endowment contracts by asking your tax professional.
What if you make a withdrawal from the policy? For policies that allow partial withdrawals, as long as you’re taking out less than what you’ve paid in premiums, the amount may not be taxed. Don’t forget, though, that withdrawing from the policy may reduce the death benefit to your beneficiaries!
To wrap up…
There are many great reasons to get life insurance, and the tax benefits for beneficiaries are one of them. You may be able to leave money for the people you love without requiring them to pay more in taxes. With anything as important as life insurance or taxes, be sure to speak to an expert you trust before you choose a policy.
Remember:
Understanding life insurance doesn’t have to be a headache. With help from our team at Gerber Life Insurance, you can not only find the best policy for you and your family, but you can do so with the confidence of knowing that there won’t be any surprises for you or your family down the road. You can call us toll-free at 1-800-704-2180 to speak to our specialist.
Please note: Taxes vary by state and you should consult a tax advisor for more information. Articles and other information included on this website are intended for the general interest of our readers and are not intended to express the positions or views of Gerber Life or to provide or constitute legal, financial, health or other advice. Gerber Life makes no claims representations or warranties as to the accuracy, completeness, or appropriateness of this general interest information for your particular circumstances. If you need legal, financial, health or other services, you should contact a duly licensed professional.
