Tax-free life insurance?

In general, death benefits received through a low cost life insurance policy are not taxable. The only portion taxable is any interest over the amount of the original policy earned over the life of the policy. For example, if you receive a death benefit of $50,500 and the policy was originally purchased for $50,000 then only $500 must be claimed as earned income. Any beneficiary is eligible to receive this tax break. 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.

In a spilt-dollar policy the amount paid by the employer must be claimed as income. There are two types of split-dollar policies; collateral and endorsement. In a collateral split dollar policy the employee own the policy. The premiums paid by the employer are interest free but must be paid back upon the cash out of the policy. In an endorsement split dollar policy the employer owns the policy and the employee can only choose the beneficiary. In this type of policy the beneficiary receives a predetermined sum of the policy from the employer. Usually the cash value of the policy minus premiums and interest paid thus far.

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.

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 low cost life insurance are complicated and difficult to interpret. In order to receive the maximum benefit from the insurance policy review the laws carefully. Experts will suggest that you obtain at least three free online quotes.