The government taxes insurance companies on their earnings so indirectly we all pay additional premiums that are built into the cost of insurance. From a consumer perspective a policy's cash values are not taxed on withdrawal unless the gains in the policy exceed the premiums a policyholder pays. The death benefit is tax free which is one of the biggest benefits of life insurance.
If the owner and insured person of a life insurance policy passes away, and has no surviving spouse, the death benefit of the policy will be added to the value of his/her estate. If this total exceeds state or federal estate tax exemptions, the excess would incur estate taxes. As of now, only 21 states have state estate and/or inheritance taxes. The exemption for federal estate taxes in 2013 is $5,250,000. So the government taxes relatively few policies with estate taxes.
Life insurance is not subject to income tax, except in some cash policy situations. If someone collects their life insurance proceeds periodically rather than in a lump sum, they will be paid interest on the as-yet-unpaid amount, and the interest is taxed. Generally speaking, the tax benefits of life insurance is one of the features that make is so desirable.
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Life insurance is not subject to income tax, except in some cash policy situations. If someone collects their life insurance proceeds periodically rather than in a lump sum, they will be paid interest on the as-yet-unpaid amount, and the interest is taxed. Generally speaking, the tax benefits of life insurance is one of the features that make is so desirable.