Tax Benefits of Life Insurance

Definition - What does Tax Benefits of Life Insurance mean?

Tax benefits of life insurance refer to the tax advantages of life insurance proceeds. In particular, death benefits are typically not taxable, and cash surrender values have taxes deferred. Policy dividends, accelerated death benefits, and more also enjoy special tax considerations.

Insuranceopedia explains Tax Benefits of Life Insurance

Death benefits, especially smaller amounts, do not get taxed as the beneficiary's income; however, larger amounts may be subject to an estate tax. Moreover, once invested, the return is taxable. Lastly, any death benefit of a transferred for value life insurance policy, i.e., sold to another party, is subject to taxes. As for cash surrender values, the yearly increases do not get taxed, but once the policyholder cashes it in, it becomes subject to taxation under the cost recovery rule.

In addition, policy dividends are treated as tax-free premium refunds, while accelerated death benefits and viatical settlement proceeds are considered non-taxable death proceeds. Lastly, an employer may write off premiums paid for employer-provided group term life insurance policies as a business expenses.

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