Are Life Insurance Proceeds Tax Free?
Are life insurance proceeds tax free? Life insurance can help your family stay afloat after your death by helping to pay final expenses, mortgage payments and more. Generally, death benefits from your life insurance policy usually aren't taxable. Learn more about this issue in the guide below.
FAQ: Life Insurance and Taxes
Questions about life insurance and taxes are common questions for our licensed agents. Some of the most common questions are listed below.
Q. Will my beneficiary have to pay income tax on the payout from my life insurance policy?
No. Death benefits are not taxed. However, you will need to pay any interest generated from the lump sum.
Q. Will my beneficiary have to pay estate taxes?
Yes, if your life insurance payout is considered a part of your estate and you have an estate that's large enough to be taxed. If your spouse is your beneficiary, there is no typically no issue. Spouses can transfer assets to one another without a tax impact. Depending on your personal wealth, you should consult an attorney or financial adviser about your options.
Q. Can I deduct life insurance premiums on my taxes?
No. The IRS does not consider premiums on a personal life insurance policy deductible. Businesses that purchase life insurance on employees cannot specifically deduct the premiums if they will directly benefit from it. In other words, if the company itself is the beneficiary. There can also be issues with key-man policies that should be carefully vetted to avoid being taxed on the death benefit.
Q. If I borrow money against my whole life policy, do I have to pay taxes on it?
Typically no, but you will pay interest on the money you borrowed. There are a number of options for paying that interest back. It is highly recommended you discuss the situation with your accountant before making a decision.
Q. If my beneficiary is a charity, do I still have to pay estate taxes on the payout?
Typically not. Though the policy value is included in the estate, the charitable donation is 100% tax-deductible. In essence, they cancel each other out.
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Life Health Pro: http://www.lifehealthpro.com/2013/03/25/10-life-insurance-tax-facts-you-need-to-know
360 Financial Literacy: http://www.360financialliteracy.org/Topics/Insurance/Life-Insurance/Life-Insurance-Policy-Loans-Tax-and-Other-Implications