Tax Implications When Receiving Life Insurance Benefits
Life insurance proceeds are generally paid without tax consequences. However, benefits from certain policies are subject to taxation, and policy owners can avoid paying the Internal Revenue Service (IRS) in other instances.
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Life Insurance Taxable Benefits
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Group term life insurance payouts in excess of $50,000 are considered taxable income with Social Security and Medicare taxes withheld. Also, group coverage on spouses and dependents exceeding $2,000 will also become taxable compensation.
Life Insurance Non-taxable Benefits
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Benefits paid out from privately-owned life insurance policies are not subject to taxation. Cash values of whole life and universal life policies are distributed tax free.
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Other Tax Implications
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Life insurance benefits can be taxed as part of the policy holder's estate. As of 2009, the value of the estate including the policy had to be under $3.5 million, or the IRS would impose a 45 percent tax rate on the property.
Misconceptions
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Policy owners can also avoid estate taxes on their life insurance policy by assigning ownership of their policy to another person. Also, the named beneficiary must be someone outside the policy owner's estate.
Warning
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If the transference of a policy's ownership isn't executed three years before the death of the policy holder, the amount will be included in the policy owner's estate.
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