Life insurance is a great form of security you can provide to your loved
ones in the event something were to happen to you. However, many people
have reservations or concerns regarding their tax liability. After all,
if life insurance benefits create a huge tax burden your loved ones will
have to bear, are you really helping them? Here’s what the IRS has
to say regarding the taxability of life insurance benefit payouts.
The IRS covers a few different scenarios. First, simplest possible situation:
you have a life insurance policy, you pass away, and your loved ones receive
a payout. In this situation, the IRS says “Generally, life insurance
proceeds you receive as a beneficiary due to the death of the insured person,
aren't includable in gross income and you don't have to report them.”
Sounds great, right? Your loved ones won’t have to worry about paying
an increased tax burden and you can provide them with the financial security
they need for the future. However, there are some exceptions to this.
If you receive any interest on your policy (some policies work in this
way), then the interest itself
is taxable and you should report it on your annual tax return as
Furthermore, things get a little more complicated when you have to pay
for your plan. According to the IRS: “If the policy was transferred
to you for cash or other valuable consideration, the exclusion for the
proceeds is limited to the sum of the consideration you paid, additional
premiums you paid, and certain other amounts… Generally, you report
the taxable amount based on the type of income document you receive, such
as a Form 1099-INT or Form 1099-R.”
In other words, the amount you are allowed to exclude depends entirely
on the amount of money you paid in premiums for your life insurance policy.
Furthermore, if your employer pays for your policy through a group-term
life insurance plan, you’re generally allowed to exclude up to $50,000
in coverage from your income. However, beyond that $50,000 benefit mark,
you’re required to include costs of the policy that you are required
to pay in your income statement in order to calculate any further exclusions.
Different types of benefits also have different exclusion rules, so it’s
strongly advised you speak with a tax professional to find out how your
policy would affect your loved ones’ tax burden before signing up.
Need help selecting the perfect life insurance policy? Speak with the Atlanta
insurance administrators at
Insurance Specialists, Inc. today at (888) 451-0883!