Taxation of Life Insurance Policies

By: Mevish Jaffer

While it’s very difficult to think about your own mortality, there comes a point in your life when you have to consider certain options regarding the protection of your family in the event of your passing. Life insurance is one way to guarantee that your family will be taken care of financially if something should happen to you. Although life insurance is not the most pleasant subject to contemplate, it’s really important for you to discuss different coverage options with your family.

There are many issues associated with life insurance you need to consider before making a decision about which type of coverage you should opt for. You need to think about how much life insurance you will need and this can depend on specific factors such as how large your family is, how much debt you will be leaving behind, the amount of money your family can contribute towards your mortgage/rent in your absence, your children’s educational expenses and much more. You also need to be aware of the different taxation rules and regulations involved with life insurance coverage.

Life Insurance Taxation: What You Should Know

There are certain taxation laws that apply to life insurance in the United States that you may not know about. The following are just some of the life insurance taxation stipulations you may benefit from learning more about:

  • The premiums you pay towards your life insurance policy are generally not deductible for federal and state income tax purposes.
  • The amount paid by your life insurance company to the insured party upon your death is not included as part of taxable income for federal and state income tax purposes. On the other hand, if the amount is included as part of your estate, then it may eligible for federal and state estate and inheritance tax.
  • If the cash value increases on your life insurance policy, those increases are only entitled to income taxes in the event of certain situations. Therefore, savings can increase on your policy without life insurance taxation pending your withdrawal of funds.

You should research these tax laws and others very carefully so that you can be well-informed and consider different life insurance taxation.

Tax Advantages of Life Insurance Policies

Did you know that there are some tax advantages to certain life insurance policies? Take for example permanent life insurance; if you own a permanent life insurance policy, you may qualify for dividends in the event your life insurance company proclaims them. Another tax advantage of permanent life insurance is the fact that the amount which is given to the recipients of your life insurance policy is usually excluded from federal income taxes.

Universal life insurance is another type of policy that offers tax advantages. One of the ways you can receive a tax break on your universal life insurance policy is through the cash value; it can accumulate interest without you ever having to pay taxes on it. In addition, if the premiums on your policy are paid for using after-tax money, the entire policy can be paid out to your named beneficiary free of income taxes if you pass away.

Life insurance is something that you need to think about very carefully and discuss with your entire family as it will be affecting them in the event of your death. The good news is you have several options as to which type of life insurance will work best for you. By assessing your financial situation, taking factors affecting life insurance into consideration, and being informed about life insurance taxation laws, you should be able to come to an educated decision about your life insurance policy and protect your family against financial difficulty in your absence.



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