Do You Have to Pay Taxes on Life Insurance Proceeds?

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Paying taxes on life insurance depends on a few key things that will be specific to your own situation. Find out if you have to pay taxes on life insurance proceeds with help from a personal finance expert and professional in this free video clip.

Part of the Video Series: Personal Finance & Life Insurance
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Video Transcript

Hi, this is Walter Pardo. I am managing director and founder of Wealth Financial Partners and WFP Tax Partners in Basking Ridge, New Jersey. Today we're going to talk about paying taxes on life insurance proceeds. It's a trick question, if you pass away and someone inherits your life insurance policy, the first thing you have to understand is that the life insurance is tax free from income stand points. If you die with life insurance in your estate, it means if the money is figured into your estate, it doesn't exempt you from the federal estate tax. So to give you an example, if I had a life insurance policy in 2012 that gave a death benefit as a widower to my kids for $6 million dollars, and my other assets were a million dollars; that means that $5 million dollars is all they allow. The $2 million dollars would be subject to estate taxes. They would inherit it income tax free but there is an inheritance tax in the state and the federal. So it's a trick question in that regard. There is another question that needs to be asked also when you talk about life insurance. If a person signs up for life insurance, in some cases as an employer, and they're deducting the premium, what they pay, then what happens is on the other end the exemption for life insurance becomes taxable. So the exemption is waived, because you're using the benefit on one side. You can't use it on both sides. So the answer to this question is that it's a trick question. You need to ask more questions.

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