Is Life Insurance Taxed at Payout?

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Whether or not life insurance is taxed at payout depends entirely on a few particular things. Find out if life insurance is taxed at payout with help from a certified financial planner TM professional with over a decade of experience in wealth management in this free video clip.

Part of the Video Series: Financial Planning
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Video Transcript

Hi, my name is Samantha Fraelich and I'm a Certified Financial Planner Professional. I'm here to talk to you today about whether life insurance is taxed at payout. Now, when we think of tax on life insurance death benefits, we often think of income tax and in most cases, and again, you should always talk to an advisor about whether your specific situation is tax-free, but in most cases, life insurance proceeds are free from income tax. However, if the deceased person own that life insurance policy upon their death, those death benefit proceeds can be included in their taxable estate. There are ways to get around this by gifting a life insurance policy to another entity such as an irrevocable trust. If that's done, it, you need to make sure it's done at least three years prior to the insured's death, otherwise the IRS may still include it in that person's taxable estate. When we say that life insurance proceeds are tax-free, that includes endowment contracts, accident and health insurance contracts, employment compensation contracts, worker's compensation contracts, employer group plans, accident and health insurance contracts. When we talk about tax-free death benefits, we're not just talking about basic life insurance policies. But typically, endowment contracts, accidental plans, worker's compensation plans or employer group plans. As always, this information is for general purposes only and you should always talk to a tax or legal advisor about what applies to your specific situation. I'm Samantha Fraelich, and I hope the next time you're the beneficiary of a life insurance contract, you have more information about whether you have to pay tax or not.


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