The saying goes, the only sure two things in life are death and taxes. But if you have planned ahead and bought life insurance for after your death, are the taxes still a sure thing?
Upon your death, life insurance money can offer some real security for your loved ones. It’s a way for you to take care of them when you are no longer living. But does the certain thing of taxes apply to the money paid out from a life insurance policy?
As with many things tax-related, it is not as simple as yes or no. Read on to learn about how taxes may impact your life insurance policy.
Does It Count As Taxable Income?
Is life insurance taxable? Or more specifically, are the proceeds given to a beneficiary taxable? Surprisingly the answer is no.
Proceeds paid upon your death are not gross income. The beneficiary does not have to report them to the IRS. Therefore, they are not taxable.
Tax On Interest
Like many laws relating to taxes, there are some exceptions. There may be a scenario where the proceeds on a life insurance policy are not paid immediately. The life insurance company may hold the premium payment.
While they hold the payment, the money will accrue interest. When the policy is finally paid out, the interest you have gained is taxable.
So the proceeds from the life insurance policy are not taxable, the interest made from the proceeds does have to be reported and is taxable.
Estates And Their Roll
If the deceased has an estate, the rules change. If the estate is the beneficiary versus a specific person, the answer changes. The person who inherits the estate then may get taxed.
There’s another way taxes might be owed. If the policy names a beneficiary, say the beneficiary is deceased before the owner of the policy, then the policy owner dies without a second beneficiary.
The proceeds become part of the estate of the deceased and are taxable.
As with all financial planning, it is smart to plan ahead. Do your research with an experienced tax and insurance expert. It would be a shame to lose a significant percentage of a policy payout because of lack of planning.
Be sure you have named multiple beneficiaries for your policy.
Life insurance policies can also be transferred to new owners. They would be responsible for premiums related to the policy.
Another way to avoid life insurance being taxable is to establish an irrevocable life insurance trust. The trust becomes the owner of the policy. By law, you cannot be the trustee of this trust. Once this is set up, you also may not revoke it.
This is where, again, a tax and insurance specialist are wise choices.
Life Insurance And Taxes
Nobody wants to imagine their own death. But surely, you plan for taking care of those you love in the event of your death. The goal of life insurance is to do that.
Do your research and work with professionals to make sure your investments and policies are protected from the tax max.
In the meantime enjoy what you earn and do your due diligence. If you plan to splurge a little and get a car loan or apply for a credit card, you can always rely on the online pay stubs generator.
Davis Clarkson is one of Paystubs.net experienced and professional accountants as well as a major contributor to the development of our pay stub generator.”