Are Life Insurance Proceeds Always Tax Free?

by Redeeming Riches on August 8, 2012

Life insurance can be a great idea for when you want to make sure your family will be protected in the case of accidental or untimely death. However, it is important to be aware of whether or not your loved ones will be penalized tax-wise when accepting the proceeds of your insurance benefits. Most life insurance payouts are tax-free, but it is vital to be aware of the instances when taxes can and will be applied.

One thing to be conscious of when signing up for your life insurance plan is who you would like to be your beneficiary. If you choose a person outside of your estate to receive your benefits, the proceeds are usually tax-free. If you choose your estate, however, your benefits will be considered part of the estate as a whole by the IRS and will be subject to taxation with the rest of your estate. It is important to clearly define your beneficiary when setting up for your benefits to be sure the proceeds go to the right person and not to your estate.

Another thing to be aware of when choosing the type of life insurance you want is how the payout will be made. Most plans will pay out to your beneficiary in a lump sum, though you do have the option of choosing to have payments made in installments. If you are considering a payout in installments it is vital to consider the tax penalties as interest can be applied to these payouts. Interest on installment payouts can add up to a pretty high number and all interest on income can be taxed. You can go to the IRS web site to research just how high the taxes will be before signing up for your installment plan, or you can go with the lump sum payment to be sure of tax-free proceeds.

You will have many options when choosing what insurance company to purchase your plan from and exactly what type of plan to get. It is always prudent to obtain as much information as you can on the different plan types and companies before shopping around; the more educated you are on these policies, the better prepared you will be to deal with the brokers. One great web site for life insurance education is efinancial.com. This web site offers answers to most questions you will have about insurance, including ways to save money, and also offers live agents to assist with anything you can’t find online.

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