Life Insurance Benefits and Taxation

Insurance in many forms are considered to be effective solutions for financial exigencies. Most common form of insurance is the life insurance that indicates the existence of pre-need contract between the insurance company and its client. Benefits in case of life insurance are usually derived by nominees and legal heirs and successors-in-interest of the insured in case of his or her untimely death. It is obviously an extra income for the beneficiaries and therefore the question is life insurance taxable will necessarily come to the forefront.

Dealing with Claim Amount

Usual practices in dealing with life insurance claims for are as follows.

• Assured amount is released in full in favor of the beneficiaries free from tax obligations.
• Beneficiaries cannot be held responsible for tax evasion due to non-declaration of the money received from the insurance company.
• Thus is general no tax obligations are associated with life insurance claim amounts received.  
  

Cases Where Life Insurance is Taxable

It does not mean that all cases of release of claim money on life insurance are free from tax obligations. There are certain cases where tax may be levied on the amount of insurance coverage releases.

• In cases where the insurance amount is not immediately released to beneficiaries according to terms and conditions in the policy, there would be accrued interests on such amount. This interest amount is taxable.

• In such cases the capital is not chargeable with taxes but the interest is not exempt from taxation as it is considered to be regular income of the beneficiary.
• Also as answer to the question is life insurance taxable, one should understand that policies classified as “incidents” where the buyer has control over the policy, can transfer it, change recipients, or get some revenue after a specific period, the insurance may be taxed.
  

The 3-Years Rule

It is necessary for beneficiaries to understand the 3-years rule implemented by the Internal Revenue Service (IRS). Unless the incidents are removed and the insurer does not apply for the Irrevocable Insurance Trust, then this rule will apply. If a life insurance holder dies within three years of getting registered under the insurance plan, he will still be considered the owner of such policies. Under the federal legislation, IRS section 2042, since 2010, the total income that can be excluded from being obligated is $1 million that is the taxable exempted amount. Both the principal as well as the interest that is received by the life insurance owner would constitute part of his or her total assets. If addition of the insurance amounts renders the income of the recipient beyond the taxable limits, it will be taxed.

Any person buying life insurances in United States should therefore try to learn the legal provisions to learn “is life insurance taxable”, and/or obtain valuable advice from an expert financial advisor or agency so as to avoid any unpleasant surprises for the beneficiaries at the end of it.