Tax Considerations For Insurance Premiums And Death Benefits

There are four different types of tax considerations for insurance premiums and death benefits. Those four are as follows;

Life Insurance Policy Premiums

Life Insurance policy premiums are not tax deductible on the income tax return of the insured person. In other words, you can't add up all of the life insurance premiums that you've paid for the year and use that as a deduction on your income taxes.

Policy Face Value

The policy face value that is paid upon the death of the person insured, is not taxable income when received by the policy beneficiary. The beneficiary of the policy receives the face value income tax free. Example, let's say that your spouse purchased a life insurance policy and named you as their beneficiary, or the person to be paid in the event of their death. The policy face value was $100,000.00 (the amount doesn't matter). This money is paid to you 100% tax free.

Federal Estate Taxes

Click here to get a free life insurance quote.

The estate of the insured individual, if it is above the upper taxable limit allowed by law, may be required to pay estate taxes on an amount equal to the policy face value, even though the face value is paid to a beneficiary other than the insured individual's estate. This occurs if the person insured and the policy owner are the same person.

Estate tax on the insured person's estate due to the life insurance policy, can be avoided by using third party ownership. Example, the wife is the policy owner and the husband is the person insured. The wife would usually also be the primary beneficiary so she could receive the proceeds of the insurance policy. This would be the face value of the life insurance policy plus any dividends that may have accrued.

Cash Value Accrues Tax Deferred

The owner of the policy does not pay income taxes on the annual increase in the policy's cash value. Upon policy maturity, no taxes are due if the amount of all prior premiums paid exceeds the cash value. If the policy cash value is greater than all of the premiums paid, the difference would be subject to income tax.