Greetings. Thank you very much for taking your time to read my article. Before starting, I want to express that the information here is for the purpose of providing you with a consultation that helps you to make what are the options you can count on, based on your budget, need and reality when analyzing acquiring financial protection. . I am not a financial analyst nor will I ever take or tell a client what product he needs. That is a sole customer decision.
Always consult with your accountant or CPA with any questions related to your financial status before making a decision.
There is an immense range of products within life insurance, since they are all different, it is obvious that we have unique needs. That said, when we choose to work with a product like this, it is worth thinking about how it affects us tax-wise. Will I have to pay any taxes because I got life insurance? How much would the amount be if that were the case? I want us to analyze together the points that I have compiled to have a clear idea of ​​how a tax event works within life insurance.
Tax treatment of the product
The basic principle within life insurance is that death benefits paid under a life insurance policy to a designated beneficiary are free of federal income tax. Now, interest paid by an insurance company on proceeds of death benefits left with the insurance company is taxable earnings, as are interest payments made by any financial institution. The same principle applies in the case of life insurance policy dividends; Dividends by themselves are free of income tax, but interest under a dividend option is taxable in the year the interest is paid.
The amount paid under a double indemnity provision and the benefits of any paid-off additions to a life insurance policy are also exempt from tax.
Paying benefits in installments (just like an annuity) as either a fixed amount, fixed period or lifetime income, one portion of each payment consists of principal and one portion of interest.
The portion of the proceeds attributable to interest is taxable, the remaining portion is received tax-free. Under the annuity rule, a fixed, unchanged fraction of each payment is considered a repayment of principal and is excluded from gross income for tax purposes.
The transfer by value rule applies if the policy is transferred by assignment or otherwise for cause (e.g. the policy is sold to another party) and the insured dies, the person who then owns the policy will be taxed on the excess product over the cause paid, including any premiums paid by the person transferring the policy. This rule does not apply to certain transfers, including certain transfers of value to the insured or a partner (or partnership) of the insured or a corporation where the insured is a shareholder or officer.
The product is paid during the life of the insured, which can occur in three ways; as a result of surrendering a policy for its surrender value, as an accelerated benefit, or as a payment received in a viaticus settlement. Depending on the tax treatment of cash values, the tax on accumulated values ​​that the owner receives when surrendering the policy for its surrender values ​​will be determined by its cost base. Only the excess of this product over the cost of the policy will be taxable. **Policy owner cost basis is calculated as total premiums paid, less policy dividends received, less any policy loans, and less additional premiums paid for supplemental benefits, such as premium relief or benefits. for accidental death.**
Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), accelerated benefits that people with terminal or chronic illnesses receive from life insurance policies may be tax-free. A person with a terminal or chronic illness can assign or sell a life policy to a viaticus settlement provider and not pay federal taxes on the amounts received. This removes tax barriers for policyholders who need access to policy values ​​due to a terminal or chronic illness.
**The tax treatment of viaticus settlements varies by state.**
1035 Policy Exchange
When a gain is realized on a financial transaction, that gain is taxable. When a life insurance policy is surrendered for its surrender values ​​and the cash value is received, a gain is realized up to the point where the cash value exceeds the amount of premiums paid.