Is Life Insurance Taxable?

Life insurance can replace some of your income, pay debts, and take care of your beneficiaries’ expenses. But is life insurance taxable?

Is Life Insurance Taxable?

Generally, your life insurance death benefit is not taxable. Your beneficiary will receive a tax-free sum. But if you do not have term life insurance, there are exceptions.

When Is Life Insurance Taxable?

Is life insurance taxable infographic from Hunt Insurance of Raleigh, NC

Life insurance is taxable in specific situations related to permanent life insurance, which includes whole life, universal life, and variable life policies. Term life insurance, however, guarantees a payout, and no taxes are involved.

Taxes for permanent life insurance:

  • Delayed payout – If you add a clause in your policy for the insurer to hold the death benefit before releasing it to the beneficiary, interest will accrue. And your beneficiary must pay taxes on the interest. Or, if your beneficiary asks the insurer to hold the fund temporarily, taxes are due on the interest income.
  • Incremental payout – When the full death benefit is paid in installments (e.g., monthly) until the funds are exhausted, your beneficiary will not owe taxes. But you may be taxed on the interest gained as the policy ages.
  • Cash value life insurance
    • Outstanding loans against a cash value policy are taxable. If you don’t pay back the loan before you die, the balance is subtracted from the death benefit.
    • If you surrender a policy for cash and make a profit, the profit is taxable.
    • Withdrawals greater than what you paid into the policy are taxable.
  • Sell a policy – If you sell the policy’s rights to a third party and make a profit, the profit is taxable.
  • Group life insurance – If you receive group life insurance from your employer, the amount above $50,000 is considered taxable income. And the death benefit is taxable.
  • Inheritance tax – If you name your estate as your life insurance beneficiary and live in a state with an inheritance tax, the death benefit might be taxable. Retirement accounts, savings, your home, and other assets increase the value of your estate. If your estate’s value exceeds the tax threshold, the death benefit may be taxed.

How to Avoid Taxes on Life Insurance

If the value of your estate is significant, you can avoid taxes on life insurance:

  • Don’t name your estate as beneficiary.
  • If your estate’s value exceeds $11.58 million (as of 2020), transfer policy ownership to another person. Visit the Estate Tax page on the Internal Revenue website for details.
  • Create an irrevocable life insurance trust if you want to maintain control of the policy but not be the legal owner.

Note: If you die within three years of transferring ownership of a life insurance policy, the full death benefit is automatically included in the value of your estate.

Professional Advice on Life Insurance Taxes

Hunt Insurance of Raleigh, NC, offers free consultations and professional guidance to help you find a life insurance policy that is right for you. Call, text, or submit our contact form to request a free consultation.

Whole Life Insurance Policy – 5 Questions to Ask First

Woman sitting at a laptop and thinking - for information on Raleigh, NC whole life insurance

A whole life insurance policy provides lifetime coverage and has a cash savings component. Sounds good, but is this option right for you? Ask yourself these questions before purchasing a policy.

1. What Is a Whole a Life Insurance Policy?

A whole life insurance policy is insurance that lasts your whole—or entire—life if you pay the policy premiums. It is a type of permanent life insurance. The policy has a guaranteed death benefit, and it accumulates cash value at a rate that your insurer determines.

2. Is Whole Life Insurance Right for Me?

Whole life insurance might be right for you in these situations:

  • You need coverage that lasts the rest of your life.
  • You can benefit from tax-deferred benefits of cash accumulation, which build over time.
  • You can afford to pay higher premiums.

3. How Much Insurance Do I Need?

The amount of insurance you need depends on how much income you need to replace, the number of dependents you have, and what expenses your dependents will incur if you are no longer living.

Factors to include in your calculation:

  • Income
  • Mortgage
  • Education for children
  • Expenses, including debt and funeral expenses
  • Savings

4. How Much Insurance Can I Afford?

Although it is ideal to purchase enough insurance to replace your income and care for your loved ones for several years, other factors may prevent you from doing so.

What to consider:

  • Your budget may limit the amount of insurance you can afford.
  • Still, life insurance is protection for your family.
  • Without buying a policy with premiums that you cannot afford, consider your essential expenses and whether limiting your spending on hobbies, recreation, or other activities can help you cover end-of-life expenses for your family.
  • Whole life insurance premiums are higher than term life insurance premiums.

5.  How Does Term Life Insurance Compare?

Term life insurance differs from whole life insurance in several ways:

  • It provides coverage for a term, or limited period—usually between 10 to 30 years.
  • It does not include a cash savings feature.
  • It is less expensive than whole life insurance.

For more information on the differences between term life and whole life insurance, read our page, Term Life vs. Whole Life Insurance – How to Decide.

Hunt Life Insurance of Raleigh, NC offers hassle-free quotes and advice to help you choose an insurance policy that is right for you, your family, and your budget. Call or text us or complete our contact form for more information.