Are You Taxed on Inherited Life Insurance Money?

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An inheritance can provide you with an immediate, unexpected cash windfall. You do need to make sure that there are no tax liabilities, though. For example, are you taxed on inherited life insurance money?

Valuable Life Insurance

Life insurance premiums might have been very low years ago. Your family member might have been making the life insurance payments for decades. You might be surprised by the final amount of the life insurance policy.

Owners of life insurance policies have many rights and powers. They can even take out a loan against their life insurance policy. This is one of the ways that people can use life insurance policies to raise capital.

The advantage of a life insurance policy is that you own it and the repayment terms are actually very lucrative. Some bank loans can be very high, especially personal loans. You might be able to fund your business using your whole life insurance policy.

You know the foundation of the capital – your life. This also make it a better DIY funding mechanism than bank loans. Banks can change their terms and conditions, whenever they want.

Whole versus Term Life Insurance

There are both term and whole life insurance policies. How are these different? Both provide a death benefit.

The term life insurance policy will pay a death benefit if the owner dies within a specified term. But, term life insurance does not offer much else.

On the other hand, whole life insurance has the death benefit, plus its cash value can build up over time. You can use the accumulated cash value later in your life, if you want. You can take loans against a whole life insurance policy. Therefore, you have more options with whole life insurance.

No Tax on Life Insurance Inheritance

Because life insurance was specifically constructed for death benefits, you don’t have to pay any taxes on this when these are inherited. The vast majority of life insurance inheritance is not taxable. What is taxable?

Cash Out Taxation

If the owner of the policy took any cash out using a loan, then he must repay the loan. There may be taxes accruing for any increase in the policy’s value above what the individual spent on the policy.

Furthermore, if you receive interest on the life insurance policy, then the interest might be taxable. The federal government might require you to fill out a special form to report this interest. Generally, Form 1099 can be used to report interest, dividends and capital gains to the government.