Life insurance can be somewhat complicated, most especially when the issue of tax is involved. So, you are not alone if you are wondering when your life insurance proceeds are taxable. Most times, your life insurance proceeds are free from tax under the following conditions:
When you are giving death benefits to beneficiaries
If your life insurance proceeds are not part of your estate, no one will tax your life insurance. To say it another way, your beneficiaries will not pay any tax anytime they want to receive your death benefits when you are no more.
When you are giving your death benefits to your spouse
This is one of the juicy parts of owning a life insurance policy. Federal or state governments will not tax your life insurance policy if you want all your death benefits to go to your spouse when you are dead. But remember, your spouse means someone whom you are legally married to.
When you are surrendering your life insurance policies
No one wishes to surrender their life insurance. But if you want to, your life insurance proceeds will not be taxed. Nevertheless, your insurer will ask you to pay a surrender fee, which is about 10% of the face value of your investment.
When you are receiving dividends
You are entitled to dividends only if you own a permanent life insurance policy like whole life insurance and variable life insurance. Anytime you collect bonuses from such policy, rest assured that your proceeds are inoculated against taxes.