Tax cuts available for various life insurance policies.

There are no tax benefits for cheap term life insurance during the life of the policy. Once the insured has passed away and the policy is paid out the policy is eligible for tax benefits. The IRS has very specific guidelines for various scenarios of a life insurance payout. For example, if you are the beneficiary of a life insurance policy and you receive the pay out from the insurance policy in one lump sum then only the interest is taxed. This would be the case with a universal life policy or a variable policy. If the amount of the payout exceeds the amount of the benefit then tax would only be paid on the difference. For example, if you are the beneficiary of a $100,000 policy and the payout equals $100,500 then you would claim $500 on your tax return as earned income. Only the amount stated in the life insurance policy is tax-free. If the payout is received in monthly installments then the tax credits are more complicated. If you receive life insurance in installments you may only exclude a certain amount. For example, if the policy payout is $75,000 and you choose to receive $1000 a month for 120 months then only $625 of it would be tax-free. The other $325 would be taxable income.

Another tax benefit offered is for spouses receiving installments from a life insurance policy paid prior to 10/23/1986. The beneficiary is eligible to claim up to $1000 per year as a tax credit. Not all benefits paid are eligible for tax credits. If you have an employer-owned life insurance policy then the proceeds paid out upon your death to your beneficiary are taxable. This is considered earned income since your employer provides it. Also, if you exchange your life insurance policy for cash you must pay tax on any interest accrued over the value amount of the policy. In general if you receive the life insurance policy in a lump sum only the differential amount is taxable. This is the case for all types of life insurance policies.

With cheap term life insurance, if you choose to receive accelerated death benefits which are monies paid to you from your life insurance policy. This decreases the payout upon your death. The proceeds of the accelerated death benefits are eligible for tax credit only if you are chronically ill or have a terminal illness. Otherwise, taxes must be paid on the policy. The tax laws regarding life insurance are complicated and difficult to interpret. In order to receive the maximum benefit from the insurance policy review the laws carefully. Experts in the insurance industry suggest that you obtain a minimum of three quotes from multiple providers.