Death Benefit and Taxes

There are many things you need to consider when selecting a never ending life insurance policy. As you are probably aware, your beneficiaries may have to pay taxes on the death benefit. This is why you need to consider carefully the pros and cons of selecting a life insurance policy.

Life insurance pays out money in the form of whole life dividends to your loved ones upon your death. You can choose how much money your beneficiaries receive, how much money you pay monthly in premiums, and any other types of benefits that go along with a life insurance policy. Taxes can be a complicated subject, so you should really consult a senior (experienced) tax attorney. Basically, as long as the lifetime insurance policy names a beneficiary, you will not have to pay taxes on the payout. However, not all death benefits are free of taxes.

Life Insurance Cash Value

When you receive quotes for policy rates from a permanent life insurance agent, you should ask him about any taxes involved in the death benefit. Whole life insurance policies have the added benefit of including cash value accounts. A cash value account is a separate account in which you deposit some of your premium payments. People like cash value accounts because they can put some of their income in the account tax-free. In addition, they can use some of the money during their lifetime to pay for things or use it to back outside loans.

Life Insurance Taxes

However, the death benefit itself may be subject to state and/or federal taxes. It depends on which state you live in. Usually, if you name a beneficiary, the proceeds are not taxed, especially if they are given in a lump sum. If the beneficiaries get more money than the death benefit names, the excess is taxed. For example, if the death benefit is $100,000 and they get $105,000, then the $5,000 is taxed only. Or, if your beneficiaries get the money in installments, then you can divide the lump sum by the number of years you pay premiums on it and the answer is your tax-free amount.

Since estate and death taxes are a complicated matter, it may be better for you to consult an attorney with any questions. They have a lot of experience sorting through different types of life insurance policy payouts. Otherwise, you may spend a lot of time going through papers, questioning things, and getting confused. There are just too many variables to address everything in this short article. Taxes are nothing to take lightly. Tax law is known to be confusing, even for some attorneys. Do not attempt to take on the burden of death taxes if you know nothing about the subject.

The bottom line is if you do not have a beneficiary, the death benefit might be subject to taxes. You should consult a tax attorney if you have questions about your death benefit taxes. Another resource is the agent of your insurance company. If you are torn between two different types of life insurance policies, choose the one that has fewer taxes associated with the death benefit. Just keep in mind one rule of thumb: if the actual payout exceeds the amount stated on the life insurance policy, there will be associated taxes on the extra amount. You should also speak with an attorney before you sign any life insurance policies to make sure you understand the tax situation. Death benefit and taxes are a part of life, and they are slight when you compare it to the money your beneficiaries will receive in order to live their lives comfortably.