|Is Life Insurance Taxed ?
| Traditionally, life insurance is considered to beneficial for people and the country as it contributes to the financial well-being of a family. It is because of this there are certain tax benefits associated with life insurance. It is important to know all the details about taxes associated with life insurance because you will know what you are entitled to pay or what you do not have to pay.
Premiums paid for life insurance are considered to be personal expenses and as such they are not deductible from your income tax returns. However, there are exceptions to the rule when a person pays for life insurance as part of an alimony agreement or when a person pays premium for a policy that is owned by a charity organization.
Businesses are allowed to deduct premium payments for employees as business expense if the premium amount is paid to the employee in the form of a bonus. However, if life insurance is part of your pension plan then the employer paid premiums are deductible.
If you die, your beneficiaries will receive the death benefit from the life insurance policy and you can heave a sigh of relief because this amount is usually tax-exempt if the amount is paid in a lump sum by the insurance company.
Accelerated death benefit:
If you are terminally ill and your life insurance policy allows you to withdraw money, this amount is not taxable as the amount is considered to be payable by reason of death of the insured. However, insured must have a life expectancy of 24 months only.
Matured life insurance:
If your policy reaches maturity and you are still alive, the amount you receive is not a death benefit. Any capital gains will be taxed as ordinary income for the tax year in which you received the distribution. Here your total invested amount is not taxed. Just the gains are taxed.
If you receive cash dividend from your life insurance, it is taxable only when the dividend exceeds the cost basis. Dividends are usually taxed on a first-in first-out (FIFO) basis.
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