Can You Be Taxed on Your Life Insurance?
Death and Taxes in Life Insurance
As the saying goes, there are only two things that are certain in this life: death and taxes. So it seems imperative that we prepare for both. That’s why we look into life insurance and why many people come up with the same question: Do I have to pay taxes on my life insurance policy? Well the question is one that could conceivably be answered in a number of ways. The details can be pretty confusing, but here’s a basic breakdown of the usual scenarios for determining taxability when it comes to your life insurance.
When is your money “safe?”
When funds are received at the end of a policy, or as they were originally intended, so long as the owner is deceased – the beneficiary will receive the full value of the policy completely tax free. So as long as the money is given in a manner NOT deemed as ‘profiting’ by the government, the sum, no matter how large or small, is not taxable.
When is your money taxed?
Any money received that would be considered profiting from the policy would be chargeable by the government. This happens more often than people think, which is why the questions is raised multiple times. A few usual scenarios include: when one defaults on a premium payments, when it is cashed in, or when it is canceled.
Whether it be default, cashed in, or canceled, the result is the same. In most cases you’ll either get all of the premium payments you’ve made back or you’ll get the current cash value of the policy depending upon the fine print of the plan you purchased. The bottom line is that if you receive cash value, (again due to default, cashed in, or canceled) and that cash value is greater than the premiums in which you had paid thus far, you have profited from your life insurance policy. Therefore, any money that exceeds the amount you paid into the premium is taxable according to the Uncle Sam.
In short, if you continue to pay on your policy and you don’t borrow against the cash value, you should be worry free when it comes tax time. If you decide to terminate your own policy, for any reason, know that any money received that is greater than what you paid into the policy will be taxable and will need to be reported to the IRS as income.
The best way to know for sure whether or not the monies from your life insurance policy are taxable, is to take your statements to a qualified accountant. He or she will be able to identify the taxability of any and all your assets and help you submit a tax return that will avoid any additional fines or fees.
