Is Life Insurance Tax Free?

One benefit of a life insurance policy is that it is typically tax-free.

When a beneficiary of a life insurance policy receives death benefits, the money is not counted as taxable income, and therefore, the beneficiary does not pay taxes on it.

There are some exceptions to the rules of tax-free life insurance. The following situations are rare, but they do exist:

One exception is if the policyholder, life insurance company or beneficiary does not pay out immediately upon death, but instead holds the benefits for a given period of time. The beneficiary may pay taxes on the interest generated during that on-hold period.

• Another exception to the tax-free life insurance is when the death benefits are paid to an estate and the people inheriting the estate may have to pay estate taxes on it.
• Instead of a lump sum payout, the beneficiary might receive the death benefit in installments. Typically, when this happens, the insurer holds the principal amount in an interest-bearing account and issues a percentage of the death benefit out over a certain number of years or installments at certain ages. For example, if the death benefit is $100,000, but it earns 10% interest for one year before being paid out, the beneficiary will owe taxes on the $10,000 in interest.
• If the policy involves three different people for the insured, policy owner and beneficiary, the death benefit may be subject to a gift tax. Generally, only two people are involved. For example, you buy a policy for yourself and your child receives the death benefits.

To find out more about tax free life insurance, Call Advanced Insurance Concepts today and Jim Rooney will work with you to find the answer. Advanced Insurance Concepts works with a variety of insurance companies and all Medicare Advantage providers in Missouri and Kansas. He is licensed to sell Health, Life and Accident Insurance, so call Jim Rooney for all your insurance needs.