What Is Tax Free Life Insurance?

Tax free life insurance is the ability to transfer a policy’s death benefit income tax-free to beneficiaries. No matter how big the death benefit is, the beneficiaries won’t pay a single cent of income tax on the money they get.

A perk of a life insurance policy is that the death benefit is typically tax-free. Beneficiaries generally do not have to report the payout as income, making it a tax-free lump sum that they can use freely.

However, there are exceptions to tax free life insurance.

One exception is if the insurer issues the death benefit in installments (known as an annuity). The insurer holds the principal amount in an interest-bearing account and issues a percentage of the death benefit over a set number of time (typically years). This can be an attractive option as it provides a steady income stream, the interest that accumulates on the death benefit is, however; subject to income tax. While the original death benefit typically is not subject to taxes.

Another exception is if the death benefit becomes part of your estate. If your estate is worth less than $12.06 million, your loved ones won’t have estate taxes; thanks to a 2022 federal estate tax exemption limit.

Another exception to this type of life insurance is if the policy involves three different people: the insured, the policy owner and the beneficiary. If a different person fills each role, the IRS considers the death benefit a gift from the policy owner to the beneficiary; and thus would qualify as under the gift tax.

Want to know 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.