No one wants their life insurance proceeds to be taxed, let alone taxed unfairly. That’s why you need to arm yourself with information regarding when governments have the rights to tax your life insurance proceeds. This knowledge can also help you decide whether or not life insurance is right for you. That said, the following are some of the circumstances when life insurance proceeds are taxable.
When you have assets/estates worth more than $5.45 million
If you die and have estates worth more than $5.45 million, governments will tax your assets. This may make you lose at least a quarter of the value of your assets, depending on the state where your estates are located.
When you surrender or make profits your insurance policy
Sometimes, people sell or surrender their insurance policy in order to avoid tax issues when they die. Even if you do that, you will still pay tax on your proceeds depending on the type of insurance policies you own.
When you receive your payouts in installments
If you are a beneficiary of a life insurance policy, you can decide to receive the death benefits as a lump sum or in installment. The good news is that collecting your payout in installment helps you to earn some interests on your proceeds; however, the bad news is that this interest is not immune to tax.
When you have outstanding loans against your policy
Permanent life insurance comes with a cash-value component. This means you can borrow money from your cash-value account at a low-interest rate. But if you default on this loan by surrendering your policy or not allowing the policy to lapse, you will have to pay tax on the outstanding loans.