Is Life Insurance Money Taxable?

Is life insurance taxable? It isn’t as much a yes or no answer as it is a situational answer. It depends on a few factors really. But when it comes right down to it, there are three things you should be aware of in order to answer this question:

  1. Consult your tax professional or accountant. An insurance salesperson is not a tax professional, and while they may be able to offer you excellent advice regarding insurance products, they are not as qualified as a tax professional in answering whether or not your particular situation is taxable when it comes to life insurance.
  2. Typically your death benefit is not taxable. This means that if you have a policy that pays $500,000, for example, the beneficiary will receive $500,000 in non-taxable money upon your death. So you can plan on this benefit being paid out and available dollar for dollar in the event a claim is filed.
  3. Another aspect of life insurance to look at is cash value, or CV. What is looked at when determining taxable money is the cost basis, or money put into the policy, and the money that has been taken out. Any money that is taken out that is accumulated gains will most likely be taxable. This operates in a similar fashion to a 401k or a traditional IRA where the taxable gain is deferred until the money is actually withdrawn.

In summary, make sure you fully understand your policy. If you have any questions, and especially if you need to file a claim or withdraw any money from your policy, include your insurance carrier and tax professional.

About cozbycpa

Heather L. Cozby is a CPA on the South Shore and Cape Cod. The managing partner of Cozby & Company, LLC, Heather has the resources and experience necessary to provide quality professional services on a timely basis and at a reasonable cost. She specializes in tax planning & preparation; audit, review & compilation services; management advisory services; bookkeeping; and accounting. Her unique niche is in working with homeowners’ associations and condominium trusts, advising with rental real estate, and providing outsourced financial consulting for mid-sized companies. She is more entrepreneurial than most accountants, and offers the best of both worlds - providing the services of a larger firm while retaining the ability to connect with her clients on a personal level.
This entry was posted in Personal Finance, Planning Strategies and tagged , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.