Tax Benefits Of Life Insurance

What Does Tax Benefits Of Life Insurance Mean?

The tax benefits of life insurance refer to the tax advantages associated with life insurance proceeds. Specifically, death benefits are generally not taxable, and cash surrender values are tax-deferred. Additionally, policy dividends, accelerated death benefits, and other aspects receive special tax treatment.

Insuranceopedia Explains Tax Benefits Of Life Insurance

Death benefits, particularly smaller amounts, are not taxed as the beneficiary’s income. However, larger amounts may be subject to estate tax. Additionally, any returns generated from invested death benefits are taxable. If a life insurance policy is transferred for value—sold to another party—the death benefit becomes taxable.

For cash surrender values, annual increases are not taxed, but if the policyholder cashes out the policy, the proceeds become taxable under the cost recovery rule.

Policy dividends are typically treated as tax-free premium refunds. Similarly, accelerated death benefits and viatical settlement proceeds are classified as non-taxable death proceeds. Finally, employers can deduct premiums paid for employer-provided group term life insurance policies as business expenses.