Do You Have to Pay Taxes on Life Insurance?

A life insurance benefit can be a lifeline for your family if you’re no longer there to support them with your income. The money they receive can help pay for things like regular household expenses, college tuition, a mortgage and retirement. 

There could be times when you pull money from a life insurance policy before your death. Plus, you may have other questions about life insurance and taxes. Here are answers to a few common questions.

Do Your Beneficiaries Have to Pay Taxes on Your Life Insurance?

One of the benefits of having life insurance is that, generally, there’s no taxation on life insurance proceeds. That means the life insurance payouts won’t be considered income for your beneficiary.

However, there may be a small tax bill. The policy could earn interest from the date of death until the date your family cashes in the policy. That interest is taxable. If your heirs take the payout as an annuity, not a lump sum, the interest on the annuity is taxable as well.

Is Life Insurance Taxable as the Value Grows?

The cash value of your life insurance policy should increase every year, but that growth is generally tax-free. 

What if I Withdraw Money From My Life Insurance Policy?

If you take out a loan against your life insurance or withdraw money from it, you generally won’t pay taxes on that amount as long as certain conditions are met. But you may have to pay income taxes on the difference if you withdraw more than that amount. 

What if I Don’t Want My Life Insurance Policy Anymore?

You can surrender your policy to the life insurance company that issued it. They may charge you a fee and you will likely be subject to income taxes on the amount over what you’ve paid in premiums. If the value is less than what you paid, you probably won’t owe income taxes.

Can I Pay Extra Toward My Premiums to Get a Tax Benefit?

Paying a lot more than what you owe on your premium so you can withdraw money and save on taxes is considered a modified endowment contract. You’ll lose the tax benefits, and you may pay a penalty if you’re under age 59½.  

Can I Claim a Loss on the Value of My Life Insurance?

There could be a situation where you’ve paid more into the policy than you would get if you surrendered or sold it. Life insurance is a personal asset, not an investment asset, so those losses are not tax-deductible. 

What if I Donate My Policy to Charity?

You can claim a charitable income tax deduction if you donate your policy. You must give the charity full control over the policy. 

Learn How to Protect Your Family and Reduce Your Tax Bill

Life insurance can give you the peace of mind of knowing your family has the financial support they need if you can’t provide for them. Reach out to a Farm Bureau agent today to learn more about life insurance options and how they may impact your tax bill.