Is Life Insurance Taxable?

If you are planning your future financial goals, you must consider life insurance in it. Life insurance gives you a peaceful life and helps you live worry-free. You can offer a helping hand after your death to your family with the help of life insurance coverage. But is life insurance taxable? Let’s find out the answers!

Many people have the same question in common when it comes to filing their income tax. Is life insurance taxable? What are the taxes one has to pay for the life insurance policy?

Is Life Insurance Taxable?

Life insurers provide thousands of dollars to their family members once their policies mature. Since you regularly pay your premiums, including taxes, the life insurance money is not taxable. The beneficiaries of the policy will get the full coverage benefit without the burden of taxes and other financial conditions.

However, the beneficiaries must pay taxes from the maturity amount in certain conditions. We will walk you through the conditions where the life insurance coverage is taxable.

Condition 1: Interest Payouts

A life insurance policy gives a lump sum amount upon the death of the policyholder. If the beneficiary of the policyholder delays getting the maturity amount, the amount starts earning interest.

On the other hand, if the policyholder chooses to get the maturity amount in installments, the remaining amount of the policy starts earning interest.

In this case, the interest the beneficiary earns are taxable. To keep it tax-free, the beneficiary must collect the maturity amount as soon as possible. If it starts earning interest, the interest you earn attracts taxes.

Condition 2: No Beneficiary

Life insurance policies are made tax-free, which means the beneficiaries get life insurance coverage with zero taxes. However, if the policyholder doesn’t include the name of the beneficiary or if the beneficiary already dies, in this case, the maturity amount goes into the policyholder’s estate.

It becomes the policyholder’s estate, and like other things, the maturity amount will become taxable just like other estates. It attracts both types of taxes, federal and state taxes.

In other scenarios, if the estate value of the policyholder is under the taxable amount, but the maturity amount adds to the estate, it makes it above the taxable amount. In this case, it attracts even higher taxes as the total maturity amount and the amount of estate combine to attract taxes.

To keep things simple, one must include the name of the beneficiary and contingent that acts as a secondary beneficiary who earns the maturity benefits if both the policyholder and the beneficiary pass away.

Condition 3: Upon Surrendering the Policy

In some cases, the policyholder has to surrender his policy, and he doesn’t want the maturity benefits of the policy. In this case, your policy will be terminated the policyholder will get the policy’s surrender value. The surrender value is calculated per the policy’s terms and conditions. You will be guided on this term when acquiring the policy.

In general, the policy value is your total cash value minus the charges of your surrender procedure. If you have completed 20 to 30 years of the policy, there will be no surrender charges. You can get your policy’s total cash value upon surrendering it, and there will be no hidden charges.

Will I be taxed on my surrender value? No, you will not be taxed and the total cash value you receive as a surrender value attracts no taxes. Only the extra income you generated out of your paid premiums is taxed.

If you have paid $50,000 as premiums on the policy and get $55,000 in return after surrendering the policy, the difference amount of $5,000 would attract taxes.

Condition 4: You Sell the Policy

If you have a life insurance policy with cash value benefits, you can sell out your policy to investors. There is a market for ill policyholders with fewer life expectancies.

Some companies are interested in buying such policies. They pay money against your policy. They become the owner of the policy and pay your premiums on your behalf. They claim the maturity amount when you pass away!

Patients can get money for their medical bills and other essential things as they do not have enough money to spend. They spend the money by selling their policy to companies. In return, the companies help patients pay their expenses.

Condition 5: You Took Out Loans on Policy

Life insurance policy with cash value helps policyholders get a loan against their policies. Since the policy is active or in force, the loan you get against the policy will not be taxable. If the policy terminates before your loan amount ends, the remaining loan amount will be taxed.

The taxed loan amount exceeds the total premiums you have paid. If you have paid a total of $50,000 as premiums, and get a loan of $55,000, then $5,000 is the taxable amount.

You can withdraw the amount which exceeds your policy basis i.e. the total amount of premiums you have paid. If you withdraw the exceeded amount, it will not attract any taxes.

What if you die before the loan ends? In this case, the remaining loan amount will be reduced from the maturity benefits against your policy.

The below-given table explains when your life insurance policy attracts taxes and when it does not!

ConditionsTaxable portion
Upon surrendering the policy with cashThe taxable amount is the money that exceeds the policy basis amount.
Upon withdrawing money from the cash valueThe taxable amount is the money that exceeds the policy basis amount.
Upon taking a loan against the policyThere are no taxes as your policy is in force.
Upon the policy going into the estateIf the amount of estate is above the taxable amount.
Upon selling your policy to a companyThere are no taxes on it.
Upon delaying in receiving the policy maturity amountThe interest you receive attracts taxes.

The Final Word:

A life insurance policy is crucial if you are worried about your family after death. It has many benefits and gives you relief as your family will have enough money to survive. Since life insurance companies offer different policies, you must compare the policy plans and go for the one that suits your needs.

Before selecting your premiums, you must calculate your total annual income, expenses, and other money that you must have to deal with your day-to-day tasks. We have explained everything in brief in this blog.

You must get all the information about the policy, the cash value of the policy, the surrender value, the loan percentage on the policy, and other terms described in this guide. It will help you share the same information with your family so that they can claim the selected benefits upon your death.

See Also

No Medical Exam Life Insurance for Seniors

Is Long Term Disability Taxable?

Is Medical Insurance Tax Deductible?

Are Medical Expenses Tax Deductible?

Are Copays Tax Deductible?

Are Medical Bills Tax Deductible?

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