Do I Have to Pay Taxes On a Life Insurance Payout?
Life insurance has grown in complexity over the years and, as a result, life insurance taxation issues have become equally complex. While you should consult with a tax professional to verify the tax status of any life insurance payout you receive, we can give you some general rules and guidelines to consider.
- Pre-Tax or Post-Tax Money – Much of the tax status of the payout for a policy depends on whether premiums were paid with pre-tax or post-tax dollars. Always remember that, somewhere along the money trail, the taxman takes a cut. Almost anything you receive that is non-taxable means you or somebody else already paid the tax on those funds.
The vast majority of policies, either employee or employer-purchased, are purchased with after-tax dollars. In that case, beneficiaries do not have to declare the death benefits as income and receive the benefits tax-free.
If the policy was purchased with pre-tax funds – for example, as p...
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