Is life insurance taxable? – CBS News

life insurance A valuable part of many people’s financial planning. It helps take care of your loved ones after your death, can provide an inheritance for your heirs and it can provide cash during your lifetime, depending Type of policy. For these reasons, Life insurance can be worth it For you, whether you young or the old.

But, as with many financial products, there are tax considerations to keep in mind. In this article, we discuss whether life insurance is taxable (and not).

Get a free life insurance estimate now to start exploring your options

Is life insurance taxable?

The short answer is: it depends. Here are situations when you need to consider taxes on your life insurance policy.

Payout to Beneficiaries

if your Beneficiary Choose to receive the death benefit as a lump sum payment, they will not have to pay taxes on it. If they choose to receive payments over several years (known as an annuity), they can earn interest on those payments, which the IRS considers taxable income.

“Generally, life insurance that you receive as a beneficiary on the death of the insured is not included in gross income and you do not have to report it,” The IRS Says “However, any interest you receive is taxable and should be reported as interest earned.”

Start your policy search by getting a free life insurance quote here.

cash value

Whole life insurance Policies create cash value, which you can do Use it while you’re alive. If you access this cash value and it is more than the premium payments you have made so far, the difference may be taxable. Term life insurance Cash does not create value, so this situation does not apply to those policies.

Surrender your policy

If you decide you no longer need (or want) your life insurance policy, you can surrender it to your insurance provider for cash. If the premium is more than the amount you paid, the difference may be taxable.

Sell ​​your policy

You can sell your policy to a third party in a process known as a life settlement. It can be complicated and it is often wise to reduce your coverage or surrender your policy. But if you choose this route, the tax consequences are the same for cash value access or surrender. If the income exceeds your premium payment, the difference may be taxable.

Estate tax

If the value of your estate exceeds the estate tax exemption, the IRS calculates your life insurance proceeds toward the value of your total estate. That means your heirs must pay estate tax on any amount on the exemption. For tax year 2023, the deduction is $12.92 million for individuals and $25.84 million for married couples filing jointly.

You can avoid estate taxes by creating an Irrevocable Life Insurance Trust (ILIT) and using that trust to pay your policy premiums. This keeps your policy proceeds from being counted in your estate value.

Request a free estimate now to see how much life insurance coverage you can get.

Gift tax

Generally, there are two parties to a life insurance policy: the person who purchased the policy for themselves and the beneficiary (or beneficiaries). But sometimes, Someone buys a policy for another person, which adds a third party to the equation. If this is the case, the IRS classifies the death benefit as a gift, meaning it may be subject to tax.

Like the estate tax, the gift tax only applies if the value of your estate exceeds $12.92 million for individuals or $25.84 million for married couples filing jointly.

Bottom line

To determine how taxes may affect your life insurance, consult a tax professional. Whether your policy results in taxes or not, there are many Because why it’s still worth staying. Make sure you get the most out of your policy by requesting offers from Best Life Insurance Company and comparing them with your needs and goals.