If you have your own family or you’re considering starting a family, chances are you or your spouse have at least considered getting life insurance as a means of providing yourself a safety net against the unforeseeable. As our CEO, Joe Pantozzi likes to say, “there are some things that you need to cover, that you can’t itemize or analyze or spreadsheet or put down on paper. One of those things is the Unknown.”
Life Insurance and Your Family’s Security
The necessity of a life insurance policy is undeniable. For uninformed consumers, that safety net can quickly become a trap that hinders your ability to attain real financial independence. Although not many people like to think about the paperwork or financial logistics that come with ‘graduation,’ understanding and when or even if life insurance payouts are taxable is an essential part of successful financial planning and infinite banking.
Typically Taxes Aren’t an Issue with Life Insurance
Interestingly, many consumers are unaware that the proceeds from their life insurance policies are not taxed. Because life insurance payouts aren’t typically included in a recipient’s gross income, it doesn’t need to be reported to the IRS. Additionally, because life insurance premiums are paid out with after-tax dollars, proceeds from these kinds of policies are exempt from further taxation.Your life insurance proceeds are safe from taxation when:
There are increases in “cash value” life insurance policies
Also called permanent life insurance policies, these were designed to increase in value via investments. Because of this, the policy’s growth isn’t counted as reportable income and is therefore exempt from taxation.
You take out lump-sum payments
Most permanent life insurance policyholders also have the ability to surrender all or a part of their life insurance policies in exchange for a lump sum. Keep in mind that if the lump sum is less than what you’ve contributed to the policy, that money is not taxable.
You receive investment dividends
Sometimes, mutual insurance companies return money to policyholders as dividends instead of cash. Until the amount you’ve received in dividends exceeds what you’ve paid out in premiums, those proceeds are exempt from taxation.
Payments are made to your spouse
Your life insurance payments to your spouse will almost never subject to federal income taxes or estate taxes.
Talk to a Financial Advisor about Life Insurance Options Today
Your life insurance policy can be one of the greatest assets that you have. But, in some cases and depending on the size of your estate, portions of your life insurance proceeds may be subject to taxation.
Our financial advisors have more than 150 years of collective experience navigating the realms of finance and life insurance. Book your free consultation today to learn how you can plan your legacy properly.