The Tax Implications of Life Insurance


Life insurance policies are confusing things, and there’s absolutely no secret about that. While there are plenty of resources available to help you understand the ins and outs of life insurance, it can still be easy to get a little lost in the details, whether you’re trying to figure out exactly which type of plan is right for you to begin with, and then what that will mean in the long run or otherwise. We’re going to talk about some of the tax implications of your life insurance policy, so you can understand how the IRS will work with and respond to your savings and payout if you or your loved ones need to wind up using the money in your life insurance policy.

Two main policy types exist: the term and the whole or universal life policies. The term policy, as it sounds, only lasts for a predetermined length of time, while a whole life policy goes on for the holder’s whole life. These different types of policies have different rewards and advantages, so you can decide which of the two is the best for you and your family. No matter what your choice, a life insurance policy has tax implications, and it’s important to be aware of them.

For one thing, the death benefit received by your loved one(s) is almost absolutely always tax-free. This means that in the event of your untimely demise, the beneficiary of your life insurance policy will receive the payout tax-free, and not have to worry about slicing a large portion off the top for the government. This can, in some pretty rare cases, be excepted, but this is when complex business policies and the like are involved. If your insurance company is mutually owned, then you might be paid dividends. Luckily enough, there isn’t any kind of taxation on the receipt of dividends — but if these accumulate at interest, when whatever interest you wind up earning may very well be taxable.

You can also take loans from your life insurance policy, and the really nice thing is that these aren’t taxable either. This is a great thing if you’re needing a little assistance in a pinch, but there are still some important things of which you might want to remain aware. If your policy receives what’s considered to be an “excessive” amount of money during its earlier years, then it might become a modified endowment contract. If this happens, your policy will lose its tax-favored status, which denies you a pretty good amount of helpful benefits.

Whatever your choices, it’s always important to gather and compare quotes, using a service like the website or a number of other helpful offerings the Internet has available. Navigating the waters of life insurance can be tricky, but these tips will help you get the most out of your policy so that you can make sure your loved ones and their futures are protected, no matter what.

One Response to The Tax Implications of Life Insurance

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