Will Government Tax You for Benefiting From Your Life Insurance Policy?

Are you worried about Uncle Sam dipping his hands into your life insurance claims? Are you scared that your life insurance beneficiaries will be heavily taxed upon your death? Then you should be informed with these facts concerning your life insurance and taxes.

Life insurance from your employer might be taxed

If you have the group term life insurance given by your employer, the first $50,000 of your premium benefits will not be taxed. The reason is that this amount is not seen as your income. However, when subsequent amount exceeds the $50,000, your life insurance policy will be taxed.

Your family won’t pay tax when receiving life insurance claims

In the event that you are no more, your loved ones will not have to pay any sort of tax in order to collect your life insurance claims. So, if your life insurance policy comes with a $1million death benefit, when you die your dependents will pay no form of federal or state income tax to claim the $1million. However, this is only possible if the life insurance company pays the death benefit at once. But if the life insurance company pays the death benefit in batches, some form of income tax rules might be applied.

Only premiums paid with pre-tax dollars will be taxed

If your life insurance policy was bought with pre-tax dollars, you will have to pay a little economic value tax on your life insurance every year. This economic value tax is the difference between the death benefit and cash value of your life insurance policy. In addition, when it is time to receive the life insurance claims, your loved ones will have to pay tax on the cash value. On the other hand, premiums paid with after-tax dollars are not taxed.