Life Insurance Tax
We are familiar with the tax imposed on purchases of supplies and services. Even the salaries that we receive are non-exempt from tax. However, can the same be said about our life insurance coverage?
Life insurance tax can refer to tax that is deducted from the interest that is earned by your life insurance dividends. For example, death benefits amount to $50,000. If the claim received after the insured’s death amounts to $50,100 then the amount $100 is taxable. However, if you only received the specified $50,000, then, it is not taxable.
The reason for this is simple: any interest that is received is subject to tax because it is generally treated as taxable income. The interest earned by the life insurance is taxable in the year that it is credited to the account, but if the amount can only be withdrawn on a specific date, then the tax is deductible on the interest on that specified date.
Whether the benefits of the insurance are to be paid out in one time or periodically, the only inclusion that must be indicated in the gross income of the tax return that you will file is only the amount that is more than the indicated benefit from the benefit, or the interest that was earned. This means that aside from the interest, the amount of the life policy is tax-free.
A lot of individuals buy life insurance policies as part of tax planning. The tax-free feature offered by the coverage provides a person the opportunity to reduce taxes on some income and estate taxes. When the cash value of an insurance policy is being built up, there is no tax imposed on this amount.
For withdrawn money from the policy that is to be paid back by the insured party, no tax is imposed. Policy loans are considered to be loans and not income that is taxable. However, when a policy is canceled, remaining policy loans will automatically be considered as income tax and will be imposed with tax.
The death benefit feature of a life insurance coverage is generally treated as part of the estate of the deceased policyholder. Because of this, an estate tax is imposed on the policy. This estate tax can be paid off by a portion of the death benefit itself. In some instances, the life insurance tax can be eliminated when the plan itself is treated as a life insurance trust. This financial strategy, however, will limit the capability of the policy owner to use the plan for personal reasons. In addition, this will require the expertise of a professional lawyer.
If you are thinking of buying a life insurance plan for the potential tax-saving opportunities that it will provide you, ensure that you have fully understood how the whole insurance policy works. You must also consider your personal circumstances since additional factors, like having a huge estate, can result to huge taxes upon your death. When you buy an insurance plan, it reverts to becoming your asset, and also a part of your personal estate. Upon your death, this addition to your estate is also a contributing factor to the amount of tax that will be determined.
Whether you are buying a policy for the potential tax gains or not, never lose sight of the primary goal of a life policy: to ensure not your immediate financial state but the financial state of your loved ones who will be left to inherit the benefits of the policy when you die.