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Is life insurance taxable? | Haven Life

If you have loved ones who are financially dependent on you, you need life insurance. Why? The answer is simple.

Paying for a life insurance policy will help your loved ones continue to pay the bills and cover your funeral expenses when you are no longer there to support them. "You have to support them at the end of your life," says Sean Mullaney, Certified Public Accountant and President of Mullaney Financial and Tax.

says Mullaney. That's right – even if nothing is certain except death and taxes, death benefits usually avoid taxes.

However, there are some cases where a life insurance benefit in the event of death can be subject to tax. It is important to be aware of these situations in order to limit the tax liability for a life insurance payment.

Why life insurance income is not usually taxable

There are two primary types of life insurance, a periodic and a permanent life insurance. ] With life insurance, the coverage lasts for a certain number of years and is usually one of the more affordable types of life insurance. For example, a healthy 30-year-old woman may purchase a 20-year-old Haven Term policy, issued by MassMutual or its subsidiary, C.M. Life, with a life insurance benefit of $ 250,000 from $ 1

4.99 a month. If you die during the insurance period, your beneficiaries can submit an application to the insurance company to receive the compensation in the event of death.

Permanent life insurance provides protection that lasts a lifetime, as long as the premium is paid.

] Payments from any of these types of life insurance are generally not taxable for beneficiaries. widows and orphans ", says Logan Allec, a CPA and owner of the personal finance site Money Done Right. "So this exemption from life insurance income is really rooted in social affairs, and this exemption from income tax has persisted to this day."

How Payment Options for Death Benefit Can Affect Tax Liability

an insurance. The default option is a one-time payment, which is generally tax-free.

However, if you or your beneficiaries choose to receive a payment in installments over time, some of these payments may be taxable.

“If you receive life insurance income in separate payments over time, and the sum of these installments is greater than the amount you would have received from the insurance company if you had only withdrawn a lump sum at the death of the insured, as part of these payments to you is considered interest ", says Allec. That interest on the lump sum can be taxed at your regular income tax rate.

As an insurance owner, you should get a Form 1099-INT from the insurance company that reports your taxable interest, says Mullaney. You may also incur an additional tax on that interest rate if you are a high-income earner.

Single taxpayers with a modified adjusted gross income (MAGI) of $ 200,000 or more and married taxpayers who jointly file a MAGI of $ 250,000 or more must pay 3.8% net investment income tax – also known as Medicare additional tax – on investment income such as interest. This is because the limit on assets – including life insurance cover – that can be transferred to heirs tax-free was much lower than it is now.

For example, in 2004, a property declaration must be filed for estates in excess of $ 1.5 million, according to the IRS. For 2020, a federal property tax exemption covers properties up to $ 11.58 million. "If you have a life insurance policy and it is part of your property, you probably do not have to worry about property taxes," says Mullaney.

If you own a large property, Allec suggests that you work with a tax planning expert to discuss tax minimization strategies. 19659002] To keep your insurance payment away from your property "it may be advisable to transfer ownership of your insurance to someone else, perhaps the life insurance policyholder", says Allec. "Another strategy is to transfer ownership of your life insurance to an irrevocable life insurance foundation, where the income from a life insurance can be isolated from property taxes, with certain requirements. Again, work with a tax planning expert to see what may suit your specific situation.

Accelerated Death Benefits and Taxes

Your life insurance company may offer an accelerated death benefit – a rider that can be added to your policy that would allow you to collect a portion of your death benefit while you live to pay for health care if you are terminally ill. There may be an additional fee for this rider, but with the Haven Term policy it is included in the policy, and an administrative fee is charged if the rider is trained.

In general, you can receive compensation in the event of accelerated death tax-free if you have been certified by a doctor who is terminally ill and is expected to die within 12-24 months (depending on the terms of the insurance). – but not terminally ill – you can still qualify for the tax exemption if you use payments for qualified long-term care expenses, says Mullaney. Ask your tax planner about exceptions that may exist.

Cash Value Payments and Taxes

In addition to offering death benefits, permanent life insurance policies build a cash value over time that can be utilized through withdrawals or loans while you are alive. In most cases, withdrawals up to the amount in premiums you have paid are not taxed, and loans regardless of the amount (provided they are repaid) are not taxable. and death benefits and can result in a tax bill if the insurance expires before the insured's death.

Life Insurance Settlements and Taxes

Another way to access life insurance benefits before you die to pay for your care is with what is called a life insurance settlement , known as a viatical settlement. There are companies that buy life insurance from people who are terminally ill for more than the cash repurchase value but less than the face value.

The money you would get from a viatical settlement would be tax free if you were certified by a doctor as terminally ill and die over the next 24 months, says Mullaney. However, the third party who buys your insurance must pay tax on the payment it collects from the insurance when you die.

Group Life Insurance and Taxes

You probably get some form of life insurance at work. If you have a life insurance policy provided by your employer, known as group life insurance, all coverage above $ 50,000 is treated as taxable income, but amounts below $ 50,000 are not taxed.

Group life insurance can be a great addition to your benefit package, especially if it is free or almost free. However, these insurances can sometimes fail if you have a growing family or if your life insurance needs change during your career.

Use an online life insurance calculator to help you calculate your coverage needs.

Peace of mind and taxes [19659006] Every tax situation is different . If you are concerned about the tax liability of your life insurance payment, you should consult a tax expert.

If you are a Haven Life customer and have questions about whether your insurance payment is taxable, the customer success team is available to help answer your questions. [19659002] If you do not have a life insurance policy, think about the peace of mind that comes with financially protecting your loved ones in a way that in most cases is usually tax free. Get your personal life insurance rate.

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About Cameron Huddleston

Cameron Huddleston is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Their Finances. About Their Finances. She is an award-winning journalist with more than 18 years of experience writing about personal finance. Her work has appeared in Kiplingers Personal Finance, Business Insider, Chicago Tribune, Forbes, MSN, Yahoo and many more print and online publications.

U.S. News & World Report named Cameron one of the top personal finance experts to follow on Twitter, and AOL Daily Finance named me one of the top 20 personal finance influencers to follow on Twitter. She has appeared on CNBC, MSNBC, CNN and "Fox & Friends" and has been a guest on ABC News Radio, Wall Street Journal Radio, NPR and more than 30 podcasts. Cameron has also been interviewed and quoted as an expert in The New York Times, Chicago Tribune, BBC.com, MarketWatch and more.

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