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- Are life insurance proceeds taxable or tax-free?
- March 10th, 2012 4:04 AM
Taxes always seem to be on the rise, so it is reassuring to know that life insurance is a rare financial tool where the beneficiaries receive the payout income tax-free.
A major advantage of life insurance is that beneficiary proceeds are exempt from income taxes and estate taxes, so proceeds can be used to offset any tax liability attached to your assets when you try to transfer those assets to loved ones.
“The death benefits of life insurance are almost always free of state and federal income taxes when they are paid to the beneficiary. Most times the proceeds can also be free of gift and estate tax,” says Brian Ashe, treasurer for the Life and Health Insurance Foundation for Education (LIFE), a nonprofit organization concerned with educating the public about insurance.
Ashe explains. “For example, if I have a ‘permanent’ life insurance plan like universal life or whole life, under current law the cash values accumulate on a tax-deferred basis, so I can access those values with no tax if I only withdraw an amount equal to what I have paid in premiums and then borrow any amount over my ‘cost basis’ and have my cash grow tax-deferred. If the policy matures as a death benefit, I can have the remaining death benefits paid tax-free to my heirs.”
Life insurance can also be used to supplement other savings vehicles such as corporate pensions, IRAs, investments and social security proceeds.
Another advantage is that in most states the policy values of life insurance are creditor protected and if the beneficiary other than the “estate” is named, proceeds can escape probate.
This article was originally published by Life Quotes, Inc.
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