Do You Have to Pay State or Federal Taxes on Money Received from a Life Insurance Policy?


Did you receive money from a life insurance policy in your inheritance? How does the state and federal tax departments treat this inheritance benefit? Do you have to pay state or federal taxes on money received from a life insurance policy?

Life Insurance Policy

Whole or term life insurance policies can be very valuable. Your family member might have been investing in the policy his entire life. You might want to get some investment advice from a professional financial planner if the life insurance policy is significant.

Some will even use life insurance to grow their capital. Insurance companies might provide you with certain benefits that banks do not. For this reason, insurance can be used as an income-producing source.

Business men might actually use insurance policies as their own banks. They are acting as their own sources for capital. The process is complicated, but if you know what you are doing, you can gain control over your money with insurance policies.

Insurance Policy Inheritance

What do insurance companies do with your premiums? They actually invest them in the stock market. Therefore, if you are really good at picking stocks, you can do exactly what they are doing.

When the stock market is rising, insurance companies can have a windfall. They have superior risk management tools to find winners.

Most life insurance policy benefits are exempt from taxation. They fall under the inheritance category – most inheritances are not taxable. The death benefits are not taxable.

The reality is that life insurance inheritance or benefits cannot be classified as new productivity. Nothing has really been created. All that is occurring is the transfer of wealth from one individual to another. There are exceptions to this general rule about life insurance taxation, though.

Cash Out Benefits

If, there are “cash out” life insurance benefits, then you might be required to pay state or federal taxes on them. These cash out benefits might be treated like capital gains. Your capital gains will be taxed based on your tax bracket.

Moreover, any interest you receive is taxable. In this example, the amount might be a key factor. If the interest received is more than $50,000 – it may be taxable on your federal tax form. You would need to count it as regular income.

If there were unpaid loans made on the life insurance, then these must be paid back. Taxes must be paid on any loan balance that is higher than what was paid into it. Unfortunately, inheritances include assets and liabilities. If you inherit life insurance, you better hope there are no liabilities on it.