With tax day just around the corner we figured now was a very appropriate time to tackle the topic of life insurance proceeds and taxes. If you’re currently in the market for life insurance coverage it’s very important to consider the tax implications of your life insurance benefits. How much will your family be taxed at the time of your death? Could you face taxes if you choose to draw upon the cash value of your policy during your lifetime? These are great questions and we’re here to help you get to the bottom of them.
Are life insurance proceeds taxable?
In most cases life insurance proceeds are excluded from income tax for beneficiaries but they can be taxed as part of the deceased’s estate. Naming a beneficiary is the best way to avoid estate/inheritance taxes.
How much will your family be taxed at the time of your death?
The first step in protecting your life insurance benefits from taxes is naming a beneficiary. In doing so you will ensure that your proceeds pass quickly and directly to your loved one(s), outside of your estate, at the time of your death. Failure to do so often means that proceeds are classified as part of the deceased’s estate and are therefore subject to estate/inheritance taxes.
There are many reasons to maintain ownership of your life insurance policy including: the ability to surrender coverage, cancel the policy, borrow against it and/or change the beneficiary. For these reasons many policy holders wait to surrender ownership. However, it is extremely important to remember that you must name a beneficiary more than 3 years prior to your death to avoid estate taxes.
Could you face taxes if you choose to draw upon the cash value of your policy during your lifetime?
If you carry permanent life insurance coverage, and maintain control of the policy, you can draw upon your cash value during your lifetime. However, you may face ordinary income taxes at the time of the cash value surrender. In the case of an accelerated death benefit, the proceeds are not taxable. Learn more about accelerated death benefits in this recent post:
There you have it. Though there are plenty of exceptions, the proceeds of a life insurance policy with a named beneficiary, for more than 3 years, is almost always tax exempt.
At IntelliQuote we offer more than life insurance quotes online, we offer one-on-one guidance from experienced, licensed life insurance agents. To help you begin your process of comparing life insurance quotes online , we encourage you to contact us today. While you’re here we also encourage you to follow our blog. Here we discuss the trending topics that impact your family’s financial health. Be sure and read these recent posts:
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