How to Report the Interest on Life Insurance to the IRS

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Any interest that you get on your life insurance policy is going to have to be reported to the IRS in a very particular way. Report the interest on life insurance to the IRS with help from a certified financial planner in this free video clip.

Part of the Video Series: Insurance Basics
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Video Transcript

Hi, I'm Karen Lee. I'm the owner of Karen Lee and Associates, and a certified financial planner and a registered rep with LPL Financial. Today we'd like to answer the question, how do I report the interest that I earn on a life insurance policy to the IRS. If you are asking the question, you must own permanent life insurance because it's the only type of insurance that pays interest. So assuming you own a permanent life insurance policy, the first part of this answer is that life insurance, cash values, grow tax deferred. Now what that means is the interest on universal life or the dividends on whole life, there is no need to report annually to the IRS. It's only at the point that you might remove the cash value via withdrawals that you would need to do any reporting. If you cancel or surrender a permanent life insurance policy, the insurance company will issue a 1099 form to show any interest or dividends that have added to the policy. Only in the year that you surrendered that coverage and received that cash value, would that interest need to be reported to the IRS. Now interestingly, only interest needs to be reported if the amount that you get out of a life insurance policy exceeds the total amount of deposits that you've put in and again the good news is that the insurance company is tracking this for you. So you don't have to worry too much about reporting if there's a need to report, the insurance company is going to send you a 1099 and let the IRS know that there has been a taxable gain on your policy. Hope that answered your question how do I report the interest on life insurance to the IRS. My name is Karen Lee. I'm a certified financial planner, the owner of Karen Lee and Associates and a registered representative with LPL Financial.


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