If you’re a life insurance policy beneficiary or have a policy of your own, you might be thinking about its potential tax implications, if not, you definitely should be. Although it’s true that the proceeds are not subject to income tax, there are some cases where it might be.
Are Payouts Taxable?
Death benefits in a lump sum aren’t taxable. The majority of life insurance holders pay for their plans in premiums. Once the insured individual passes away, the benefits would be paid out to the beneficiary in a lump sum. When premiums are paid and distributed this way, it’s tax-free unless there’s an issue over estate taxes.
If you have a permanent life insurance, you could accrue cash value in your policy without being taxed. Additionally, for insurance plans that pay dividends, these aren’t taxable, considering that you didn’t receive more than the premiums you paid.
Are Installment Payments Taxable?
There are some beneficiaries, and insurance holders opt to organize their policy in a way that benefits are distributed to the beneficiary in monthly or yearly installments instead of one lump sum. Because most of the policy earns interest this way, it’s counted as taxable income.
What About Estate Taxes?
If you’re planning on excluding your policy from taxable estate, you could make your spouse or a family member as the beneficiary, suggests a renowned asset protection lawyer. He adds that a life insurance plan that is left to a spouse isn’t considered a part of the deceased’s estate.
What If you Surrender or Withdraw from the Policy?
Any cash that you withdraw from your policy that’s higher than what you paid for in premiums is counted as taxable income. Consider taking out a loan from your policy instead of making withdrawals. Likewise, if you plan on surrendering your policy, the difference between the premiums you paid and your plan’s value is taxable.
With thorough planning and supervision of your policy, you could keep a significant sum of money from the government and leave it to your beneficiaries. In general, bear in mind that when it comes to taxes and life insurance, you could trigger taxes if the benefit you get from it is more than the premiums you paid off. This also holds true for any interest you earn in your policy and for the money you get, during withdrawal or surrender.