Life Insurance Company

Many people seeking life insurance are concerned with the tax consequences of a life insurance policy. Since most of us have different insurance needs, the type of policy that you’re purchasing will affect how much, if any taxes are owed. I will try and cover the basics of the question but as with any important financial matter, you should consult a knowledgeable tax professional, who is familiar with your specific situation.

One of the questions you’ll be asked when getting a life insurance policy is; who are the beneficiaries? In other words who do you want to inherit the proceeds from the policy? If you choose an individual or individuals, then typically, the proceeds are tax-free. This can of course depend on how large your estate is and other governing factors. This is because when you pay your life insurance premiums you are paying them with after-tax dollars. This generally means that when you pass away the insurance proceeds are not taxed.

Some insurance policies are meant to benefit you while you are living, too. These types of policies will take the insurance premiums that you pay and invest them. Many companies will invest them in stocks, bonds, mutual funds, money markets or other investment vehicles. With these types of insurance policies the cash value of your policy will increase. This is the same principle as getting interest on a bank account or a stock dividend. Most of these policies are set up so that the earnings are tax-deferred meaning that you do not pay tax on the earnings until the money is paid or you terminate the policy.

Some life insurance policies will let you borrow the money from your policy. This does not have any tax consequences, as long as you pay the money back. These loans are usually set up with a low interest rate and since you are essentially paying yourself back are much more economical than getting a bank loan. If you do not pay the money back or you terminate the policy then you will have to pay taxes. You will not have to pay taxes on the premiums that you paid but you will have to pay on the money it has earned.

There are circumstances when a life insurance policy will be taxed. This is typically when an individual is leaving a large or complex estate. Since estate taxes can be complicated we will not be discussing them here but again, we recommend you talk to a tax professional. Most life insurance policies can significantly reduce the amount of taxes that you or the beneficiaries you have named will have to pay. Ultimately, protecting your loved ones after you are gone is what insurance is for.

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