Are Life Insurance Death Benefits Taxed?

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Whether or not life insurance death benefits are taxed depends entirely on a few specific things. Find out if life insurance death benefits are taxed with help from a financial industry expert in this free video clip.

Part of the Video Series: Life Insurance Lessons
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Video Transcript

Hi, my name is Phil Cioppa, and I'm the host of the nationally-syndicated radio program, "The Phil Cioppa Show," and today I want to speak to you about whether or not the benefits received from a life insurance policy are taxable. If indeed you are the beneficiary of a life insurance policy that has been in force, you will not be taxed on that. That is tax free money and this is why so many people use life insurance. However, we need to be careful because there is something called a modified endowment contract and that is when the person who owns the insurance policy overstuffed the premium because the government has a certain amount of premium you can put in, if you've overstuffed that premium then you can be taxed on a certain amount of the death proceed. But very few people would really do a modified endowment contract if they're younger. If they're over the age of 70 or 80 and they have that kind of policy, then there really aren't any ramifications. But if they're younger and they begin especially to take money out of it, there is going to be tax. Now we talked about death benefit, no you're not going to be taxed on that but if you start drawing money down from your life insurance, part of it will be taxed. The interest and the dividends that you have earned from it are taxable and that's something that's very important to realize. You don't want to get into a situation whereby you are taking money out of your insurance policy and obviously reducing the face of the policy and also being taxed on it. So you want to speak with a financial adviser and with a tax consultant before you would do that. If you've been fortunate enough though to be a beneficiary of a regular ordinary life insurance policy, you've avoided probate in your state, you've avoided federal taxation, you've avoided any taxation whatsoever and that is money that you can have tax free. That's why we say that insurance is the best gift that you can give to someone. Thank you.

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