Agent Owner, Gilmore Insurance Services, Marysville, Washington State
The only taxed dollars usually on an insurance policy are those used to pay the premium. The death benefit is usually income tax free. I use the word usually because there are always exceptions to the rules depending on the situation. Generally, the IRS wants a tax paid on either the money going in or the money coming out. So your retirement plan allows you to write off the money paid into the plan while it's growing. Then when you start to withdraw those funds, the IRS applies taxes to them. Life insurance works in the opposite direction. You pay taxes on the premium collected and none on the death benefit and depending on what type of policy you've purchased and how you've structured it anywhere from "none" to some on the gains. That is why some people choose to use a life policy as a supplement to their retirement plan. The combination creates the opportunity to minimize taxes at the start and finish of your plan.
A life insurance death benefit is received by the beneficiary income tax free. If the deceased's estate, including the death benefit paid by the life insurance policy, is over the amount exempted from state and/or federal income taxes, the beneficiary may be requested to pay part of the estate tax.
Agency Owner, The Thomas G Sheehan Agency, 27 Glen Road Sandy Hook, CT 06482
Life insurance proceeds are received by your named beneficiary and are not subject to either federal or state tax. That having been said, if the proceeds are invested, then any growth that is realized is taxable by both the Feds and the State as income. There may be Estate Tax issues depending upon the circumstances so be sure to discuss this with your Tax Professional.
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
The taxation of life insurance is relative simple. The death benefit is income tax free to a live beneficiary. The death benefit is not included in the estate but the value of the proceeds can be used to determine potential estate tax.
If a life insurance policy is surrendered that amount that is in excess of the premiums paid is subject to income tax as received. Generally it is determined that the principal is withdrawn first so taxation doesn’t occur often.
The taxation of life insurance makes it an important part of a financial plan.
There is really only a couple of situations when life insurance is taxable. If the death benefits go to a proper beneficiary such as a person, organization or business, they will be tax free. If the cash value is "borrowed" from a cash value life insurance policy, it too is tax free.
The first taxable situation on death proceeds is if the beneficiary is the estate, this can trigger taxation. Be sure this is not the case. The second taxable situation is with the cash value of a policy that is allowed to lapse or surrendered, which is life insurance speak for cancelled. In these cases the excess gains would be subject to ordinary income taxes.
I highly recommend talking over options with your agent, advisor or insurance carrier before making a costly decision.
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If a life insurance policy is surrendered that amount that is in excess of the premiums paid is subject to income tax as received. Generally it is determined that the principal is withdrawn first so taxation doesn’t occur often.
The taxation of life insurance makes it an important part of a financial plan.
The first taxable situation on death proceeds is if the beneficiary is the estate, this can trigger taxation. Be sure this is not the case. The second taxable situation is with the cash value of a policy that is allowed to lapse or surrendered, which is life insurance speak for cancelled. In these cases the excess gains would be subject to ordinary income taxes.
I highly recommend talking over options with your agent, advisor or insurance carrier before making a costly decision.