Are life insurance proceeds taxable?

Wherever large sums of income are involved, taxation is a big deal.

Taxes are always a burden, but even more so on the money you are leaving to your loved ones. It does not take long to gain the wisdom to ask about the tax ramifications of life insurance benefits, or proceeds. Life insurance, fortunately, is one case where proceeds are collected tax-free.

That’s one of the benefits of life insurance policies.

The benefits of life insurance policies come from a variety of useful products that serve differing paths, and various life stages. That means that there are different types of life insurance, though all pay out the death benefit portion tax-free to beneficiaries.

The most basic type of life insurance is term life. Term life has a definitive end date for coverage, defined by the number of years, or the term, that it covers.

Typically, such policies are intended for un-emancipated children, minors, of parents.

In case something happens to one or both parents, policies will pay out death benefits.

Most policies will fortunately never be called upon for the death benefit payout to beneficiaries. Such policyholders often feel like they have thrown money out the window, with nothing to show for it.

There are life insurance products that come into play and reward policyholders in other ways. Be sure to use the FREE comparison tool above to start your search now!

Benefits of Life Insurance

The latter type of policy, which gives a reward other than just a death benefit is the Cash-Value Life Insurance.

They are also called permanent life insurance. It means that the policy stays with you for life.

For many people, the annual premiums are too hefty, so they skip cash value policies and invest their money independently and choose a term life plan instead.

There are a few types of permanent life, including

1. Variable life
2. Whole life
3. Universal life

Is permanent life taxable?

Permanent life insurance policies build value, which may include investments such as stock funds and bonds. It is natural to wonder once again if this is taxable upon your passing. The answer is the same.

There is no taxation on the proceeds of a life insurance policy. It is because you can transfer the assets you built within the policy free from estate taxes and free of income taxes.

Here is one part that policyholders do not always think about when buying a policy. Now, your policy payments are not all going to the death benefit or the cash value. Instead, it is divided among different aspects of the policy:

1. 

   Death benefit

2. Cash value and investments
3. Insurance company costs to oversee your account.

Obviously you are not paying the full allotment of premiums for your life all at one time. That means that the cash value will not be fully matured early on either. As you pay your premiums, a portion of payments goes toward the cash value.

Over time, the cash value is invested in fairly tame manners, which may not carry a huge degree of risk.

When you pay your premiums in initial years, the insurance company puts more of your money toward the cash value than in later years. The reason is that as you age, by default, you become more expensive for the insurance company.

In other words, if you pass then they have to pay out the death benefit as well. As you age, there is a greater chance the policyholder will die.

Always read the fine print and ask questions when you are reviewing various policies to decide which one is right for you.

Buying Life Insurance

Shopping for life insurance is involved because you are a unique individual. Basically, the process is more complex than buying shoes, because the insurers need to collect information on your present health, medical history, bad habits, dangerous hobbies, and dangerous jobs.

For instance, the insurers will look at how good you are at paying your bills in a timely manner. If you pose any risk for non-payment, the rates for your premiums increase.

If you have pre-existing health conditions, a load of say moving violations, then you might also be asked to pay more for your life insurance policy.

Now, there is a distinct difference between the amount of risk posed to the cash value policies. Whole life provides a guaranteed cash value. Universal life insurance policies build value based upon current interest rates.

Meanwhile, variable life insurance invests into sub-accounts, similar to financial investment vehicles such as mutual funds.

Taking Responsibility Seriously

It is all well and good that an insurer looks at your credit score. What is actually more important for you when buying life insurance is to make sure they can foot the bill when called to do so. For instance, you need a carrier who has the highest credit worthiness score possible. You can find such information at the following sites:

1. Weiss Ratings
2. A.M. Best
3. Moody’s

How to Access Your Cash Value

Of course there is no one-size-fits all answer about how to get at your own money. You may do any one of the following:

1. 

   Policy loan

2. Cash in the policy
3. Partial withdrawals
4. Sell your policy to a life insurance settlement company
5. Trade for a long-term care policy
6. Trade for an annuity

The first point is to look at why you need the money. If you are facing hefty medical bills as you or your loved one ages, you might consider swapping the life insurance for a long-term care policy.

Better yet, consider buying a rider to your existing life insurance that covers any variety of long-term care needs. It’s worth noting that most long-term care needs are not permanent and thus do not require life-long care.

So, it may be a bit hasty to dump the benefits of life insurance you have built over the course of your life for a LTC policy. If the purpose is to send the kids to college, consider taking out some money as you need it.

Many people plan on using their permanent life insurance products for life’s big expenses, such as retirement, the kids’ college, and even long-term care.

Do make a plan for the money and decide in what scenarios you would take a cash withdrawal versus when you might cash out the whole policy, or just borrow money against it.

It will help keep you financially afloat if you have built in your own curbs on how the money gets spent.

Use the FREE comparison tool now and start your search!