You know the old proverb: Nothing is certain except death and taxes. As you prepare for the former of these unavoidable certainties with a life insurance policy, it may raise a few questions about the latter, such as, does life insurance get taxed?
There are plenty of details to get sorted when setting up a life insurance plan, such as whether you should go with a whole or term policy and how much you need to ensure your loved ones are well taken care of. Policyholders and beneficiaries may wonder if taxes should be a concern as well.
Timothy Boyle, life and annuity manager for AAA Northeast, helps to answer a few common questions about life insurance and taxes.
Does life insurance get taxed?
The death benefit from a life insurance policy is not taxable, no matter the amount.
However, life insurance may get taxed if the death benefit goes to an estate instead an individual, which happens if there is no beneficiary listed on the policy or if the policyholder outlives their beneficiaries. In this case, those that inherit the estate may be subject to pay estate taxes.
Do you pay taxes on life insurance payouts?
At the time of the policyholder’s death, beneficiaries have several options for how they can withdraw payout. They can choose to receive the money as a lump sum, have it roll over into their own life insurance policy or break it up into installments over the course of several years. “It is very important to discuss your options with your agent to make the correct withdrawal choices,” said Boyle.
In the instance where payment is withdrawn gradually, any interest that grows on the principal would be subject to tax.
There are some policies that gain a cash value that grows over time. If someone takes out loans on these types of policies, they don’t pay taxes unless they surrender the policy and there is an excess in what they owe.
Is a life insurance premium tax-deductible?
The premium on a life insurance policy is not tax-deductible.
Do you have any other questions about life insurance and taxes? Ask us in the comment below.