Your Life Insurance Tax Questions Answered
If you are thinking of making an investment in life insurance, you might wonder how this will affect other aspects of your financial security.
Like with all insurance, you will have to pay a regular premium for your policy, and all plans will pay death benefits to your beneficiaries upon your death. Additionally, many plans offer cash value benefits which you can draw upon as income while you remain alive. In any case, a payout from a life insurance policy might make you wonder what your tax liabilities will be down the road.
Here at TW Group, Inc. we’re committed to helping you understand all aspects of your life insurance, including where you might face a tax burden in certain cases. Keep reading to learn more, or call us at
for more information.
Is Life Insurance Tax-Deductible?
Your premium for your personal life insurance policy is not tax deductible. Some businesses qualify to deduct life insurance costs from their taxes if they provide policies to employees. However, employees are not eligible to deduct their portion of the premium.
Is a Death Benefit Taxable?
Even though you cannot deduct a life insurance premium from your income taxes, the death benefit within your policy will usually also be income tax-free. Overall, once the beneficiaries receive the life insurance payout, that money is theirs to use as they see fit.
There are some cases where beneficiaries will be required to pay tax, such as if estate taxes apply, but these are generally rare. Additionally, tax burdens will apply to the cash value elements of your policy in certain cases. See below for more information.
Is Life Insurance Cash Value Taxable?
Certain life insurance policies offer cash value accounts. With this plan, a portion of your premium will be placed in an investment account, which will accrue value over time. As this account grows in value, you can withdraw money from the cash value as a source of income in later life.
Cash value accounts will offer you a couple of different tax advantages. The cash value will grow tax-deferred, so there will be no taxes taken out of the fund while it remains in place.
However, if you want to withdraw money against your life insurance plan’s cash value, then you might run into a couple of different tax burdens.
If you take out a loan against your cash value benefit, then you can do so without facing an income tax requirement. However, you are still required to pay that loan back to the insurer.
Your policy’s cost basis is the amount you have paid into the cash value account through your premiums. If you withdraw a dollar amount that is lower than the cost basis, you can do so tax-free. However, money withdrawn in excess of your cost basis will be subject to taxation.
Choose Us For All Your Life Insurance Needs!
It’s always a good idea to work with your life insurance provider to discuss precisely what your tax burden will be for cash value accumulation and other portions of your policy. However, the good news is that you will often face a significantly low tax burden on life insurance, which is why you have a great incentive to invest in this policy today.
Contact your TW Group, Inc. agent today at 630-737-0300 and we will be ready to help you get the life insurance policy that will offer you the best financial advantages at all times.