You’ve gone through the process of understanding life insurance. Death benefits, beneficiary, term, cash value – you know all the terminology and how it relates to you. You have picked the right policy for you and set your beneficiary. You’re a life insurance expert now, right?
But one area of life insurance that often goes overlooked are the tax implications. You want to make sure you are getting all the deductions you’re eligible for, and that you avoid any mistakes down the road. So now what?
There’s no need to panic. We’ve come up with some pointers to help you understand some common questions about taxes and life insurance.
Is Life Insurance Tax Deductible?
As a general rule of thumb, your life insurance premiums are not tax deductible since your policy is considered a personal expense. Your income is the base on which taxes are levied, and it is with that income that you’re paying premiums.
The only time premiums could be considered deductible is if you are donating the death benefit to a charitable organization. Your beneficiary could also be eligible for a charitable deduction on their income if they grant the death benefit to a charity.
Will My Life Insurance Be Taxed?
Most life insurance policies are not taxable. This means your beneficiary would receive the full payout if death occurs.
There are certain situations, however, in which your life insurance policy is taxable. One is if you do not name a beneficiary. If this happens, your plan is considered a part of your estate and is now eligible to be taxed.
If there is interest accruing on the policy, it is considered a part of your taxable income for the year. Usually, the cost of the contract will take this factor into consideration.
There is a lot of information available when it comes to income tax and your life insurance policy, so it’s important to thoroughly review all information related to tax filings.
The easiest way to ensure you have all the information you need for next tax season is to speak with a tax professional, since your insurance agent can not give tax advice. Go through your policy to see what the tax implications are, and you won’t get caught off-guard. Start early, know your policy, and consult tax experts.