What Taxes Can Insurance Be Exempt From?

by Life Insurance May. 31,2023
What Taxes Can Insurance Be Exempt From?

Everyone basically says that life insurance is tax free, but in detail, what type of tax is it?

       Life insurance’s death benefit, policy beneficiaries are exempt from income tax. (Income tax)

Here's a reminder: money from the 401K retirement account (including 403B), once a person dies, will be immediately transferred to the heir. When counting the income of the heir, the tax must be paid in one go and the remaining money will be given to the heir.

Why does life insurance not count as income?

The reason is simple: if you have a house, you take out home insurance. Unfortunately, one day, the house was destroyed by fire. The insurance company pays you the insurance money. Should Insurance Money Be Your Income? Of course not! Because your house is gone, this insurance indemnity is the money to compensate for the loss of this house, it's just a replacement!

The same goes for life insurance. Assuming that the insured is the main source of family income, in the event of misfortune, the death benefit is in fact to replace him as a person in order to continue making financial contributions to the family.

This is the logic behind the death benefit of life insurance is not considered income.

Money taken from life insurance by loan, does not count as income so do not need to pay income tax.

When some brokers sell life insurance, some key details are not clearly stated. For example, at this point, they intentionally or unintentionally obscure the phrase "withdraw tax from life insurance policies".

Only insurance policies with savings and investment functions can be withdrawn. The amount you can withdraw is determined by the cash surrender value of the contract.

Why favor contract loans? the reason:

Originally, the death benefit for life insurance was left to the beneficiaries after the death of the person, and now we can use it first by ourselves. In fact, we “borrow” death benefits in advance from our beneficiaries. The collateral for "borrowing money" is the cash surrender value of the policy. This is why the money that the police can "use" must be included in the cash value.

Since this is a loan, there will naturally be interest. But on the one hand, the money is yours. In addition, since the insurance company wants to take the money when it is alive as a selling point, the interest rates charged are extremely low, and some even simply zero.

Inheritance tax issues

If it is a single life insurance, the policy holder (policy holder) is a natural person, after the death of the person, the death benefit is included in the total estate to calculate inheritance tax.

Fortunately, however, the current estate tax reduction in the United States is increasing year by year. In 2018, it was already $ 11 million. The couple represents 22 million US dollars. For most families, it is still far from this threshold.

If you are still worried about too much property and there will be inheritance tax issues, there are different solutions we’ll explain in the future