The IRS typically considers most types of income as being subject to taxes, and it’s natural to think that a life insurance policy would be put to the same standards. It may surprise you to learn that the distributions from a life insurance policy are exempt from taxes. That means your beneficiaries get the entire amount from your life insurance in the event of your passing, which means they won’t get shortchanged when they receive the money.

What the IRS Says About Taxing Life Insurance Benefits

The IRS states that the proceeds a beneficiary receives from a life insurance policy can’t be included in the annual gross income. This is true no matter if you get life insurance in NYC or Connecticut.

What this means for a beneficiary is that the money they receive from the face value of the policy is theirs to keep without worry. The IRS will not come after them for a disbursement from the policy at any point.

Understanding the Face Value of a Life Insurance Policy for the Purpose of Taxes

It’s worth noting that a life insurance policy states a set amount it will pay out if the policy owner passes. However, some policies offer the payment of interest on the face value, further increasing the amount that is to be paid out. The accumulated interest is not considered to be part of the face value of the policy, which adds a twist to the tax-free status of a life insurance policy benefit.

Sometimes Taxes Do Apply to a Life Insurance Policy

There are a couple of situations where the proceeds from a life insurance policy becomes subject to taxes. One is interest income, and the other is who owned the policy when the insured passed away.

Taxes on Interest Income

Interest that’s been paid on the face value of the policy is subject to income taxes. The amount of interest paid is separated from the face value and entered on the tax return as interest income. How much tax is ultimately paid is dependent on the amount of interest received and the income bracket of the beneficiary. This applies to all types of interest-bearing life insurance policies no matter if it’s personal or through a NYC employee life insurance group.

Estate Taxes

Ownership of tangible and intangible assets creates what’s known as an estate. Everyone has an estate, no matter how little in the way of money they have or possessions they own. A life insurance policy can be made payable to the estate, but this creates a taxation issue for the beneficiaries.

People sometimes buy a life insurance policy and use the language of “payable to my estate” in the event they pass. This language sounds sensible on the surface, but it greatly impacts the disbursement of the funds to the beneficiaries by putting the money into the probate process. It also removes the advantage of naming a real individual as a beneficiary.

The value of a life insurance policy can also inflate the value of the estate, subjecting it to an even higher tax rate that your heirs are required to pay. Make sure that your policy doesn’t contain this particular language, and that your beneficiaries are the direct recipients of the life insurance policy.

Call Margolis & Associates Today for More Information About Life Insurance

At Margolis & Associates, we can assist you in finding a life insurance policy that provides support to your loved ones in the event of your untimely passing. Contact us or give us a call to talk to one of our agents about life insurance, how much coverage you need, and what happens if the policy is invoked. We’re here to help you get the right coverage, answer all of your questions, and provide support.