Do I Pay Taxes on Life Insurance Payouts?
Life insurance can ease the sting of losing a loved one by making sure financial troubles don’t pile on top of grief.
But if the life insurance policy’s payout creates an unexpected tax bill, its planning may be less effective than you intended.
Here’s what to expect if you ever receive a life insurance policy payout, and what to know if you’re planning to protect your own loved ones with a life insurance policy from Quality Choice Insurance.
Interest on Unpaid Death Benefits
Instead of receiving a lump sum, life insurance beneficiaries can receive their payout gradually. The portion of the death benefit that hasn’t yet been paid out earns interest. Like interest on a regular savings account with your bank, it is typically taxable income.
Surrendered Life Insurance Policies
If you have a permanent life insurance policy that you no longer want, you may be able to get back your policy’s cash value minus any surrender fees. The difference may be taxable if you get back more than you paid in premiums,
Policy Loans and Withdrawals
Funding cash value life insurance with large premiums up front means the IRS may consider the policy a modified endowment contract. In that case, loans and withdrawals may be taxable.
Estate Taxes
In 2024, the estate tax exemption is at an all-time high of $13.61 million ($27.22 million for married couples). If your wealth meets that threshold or your state has a lower exemption, taxes could reduce your beneficiaries’ payout. Life insurance counts as part of your estate unless you place it in a life insurance trust.
Quality Choice Insurance Agents Can Help you Navigate Your Choice for Life Insurance to Make the Best Decisions!
Contact us today to discuss the tax implications of your current life insurance policies and see if we can help you avoid paying more than you need when the time comes.
