Tax breaks offered on life insurance.

There are many different types of tax cuts offered to holders of discount life insurance policies. The IRS allows you to claim the premiums made on a life insurance policy as a tax deduction on your yearly taxes. However, when your policy is cashed in there are specific deductions for the way your beneficiaries choose to receive the cash value of the insurance policy. In most cases if your beneficiary chooses to receive the payments in a lump sum then only any interest made over the original value of the policy needs to be claimed for tax purposes. For example, if you purchase a policy for $100,000 and it earns $500 in interest over the life of the policy your beneficiary would have to claim the $500 as taxable income. The $100,000 that you originally purchased the policy for does not need to be claimed as earned income.

If your beneficiary chooses to receive the payout in monthly installments then they will have to claim a portion as earned income. The IRS has a formula to help aid you in figuring out how much of the monthly payment must be claimed. Also, if you are as widow/widower of someone who passed prior to October 1986 and are still receiving benefits you are eligible to claim up to $1000 per year for a tax credit even if you have remarried.

Not all policies qualify for tax breaks.  If your employer then the cash value of the policy provides your policy to you is considered taxable income, even if you no longer work for the employer at the time of your death. The life insurance policy is considered income from the IRS' standpoint. 

If you choose to receive accelerated death benefits prior to your death as a sort of loan then this must be claimed on your taxes as earned income. The amount you borrow from your policy will be deducted from the overall cash value. If you consistently borrow money from you discount life insurance policy then you may deplete your policy until there is nothing left for your beneficiary. This defeats the purpose of purchasing a life insurance policy. The reason most people purchase a policy is to ensure that their dependants are financially secure upon their death. Whether to provide some income, pay off debt, or to help cover funeral expenses upon the insured's death. The tax penalties for receiving accelerated death benefits can cause you to lose money over the life of the policy. Experts in the industry highly suggest that you seek and obtain at least three free online quotes.