Moments When Your Life Insurance Policy Becomes Taxable

Sometimes, your life insurance policy can have an impact on how high your taxes will be. However, there are some options you can choose that will turn your life insurance policy into a taxable income. Also, the type of life insurance policy you choose can affect whether your beneficiaries will have to pay taxes.

When You Receive Scheduled Payments

Some of the benefits of your life insurance might be taxed, such as when your insurance policy allows for payment options other than a lump sum. If you receive regular payments from a life insurance company, these payments might be treated as a taxable income. Scheduled payments are taxed because they are placed in interest-earning accounts. The portion of the life insurance payout that is considered interest is taxed.

When You Sell Your Policy

If your life insurance policy is sold before the insured's death, the earnings from this sale are taxable. Insurance policies are sold as a more lucrative alternative to canceling a policy. The third-party you sell your life insurance policy to makes the premium payments and receives the payout when you die.

When Your Employer Provides A Lucrative Policy

If your life insurance was paid for by your employer, there might be a tax expense. This is only triggered in amounts that are higher than $50,000. Then, you will be required to pay Social Security and Medicare taxes on the amount exceeding $50,000. The taxable income will be based on the economic value of the policy benefits. 

When Your Policy Becomes A Part Of Your Estate

Even though the life insurance policy benefits that are passed onto your loved ones will not be taxed directly, the life insurance policy will become a part of your estate and will have an impact on your estate tax. One way to avoid this is if the life insurance policy is owned by someone other than the deceased. Also, benefits will not be taxed if they are transferred to your spouse.

When Your Premiums Are Paid With Pretax Dollars

Whether your premium was paid with pretax or after-tax dollars affects whether you must pay taxes on it. If you obtained the policy yourself, you will likely have paid the premium with after-tax dollars. Also, a life insurance policy paid for by your employer will not be taxed unless you are given the option to contribute to a retirement plan using pretax dollars.  

For more information about life insurance taxation, contact a company like Bauer & Associates LTD.