Is life insurance really tax-free in the United States? - Guide to Life Insurance in the United States©️

The one-time compensation for death compensation to the beneficiary is a typical tax-free income.However, in some cases, it may be taxed, such as compensation in a certain way of instalment, and the compensation exceeds the tax allowance.

American Life Insurance Guide > Life Insurance Academy > Is American life insurance really tax-free?

We usually hear that life insurance is tax-free, and it also allows the beneficiary to have a tax-free fund when facing major events in their lives.But in the United States, where the tax regulations are so thorough, can such a large sum of money really be tax-free?Normally, yes.If you want to know why life insurance policies can be tax-exempt, what circumstances have exceptions and other related knowledge, please followAmerican Life InsuranceGuide network insurGuru©️Life Insurance Academy, let’s understand:

U.S. government's tax exemption regulations on life insurance
Under what circumstances does life insurance need to be taxed?
Are insurance premiums tax deductible?

Life insurance contract definition and tax regulations

This section summarizes and introduces the legal basis and tax regulations of life insurance contracts by quoting U.S. tax laws:

US Code, Title 26, Subtitle A, Chapter 1, Subchapter B, Part III, § 101 – Regulations related to compensation for specific deaths: This regulation discusses compensation for natural deaths, laying a legal foundation for the death compensation income of life insurance, and it also includes provisions on early compensation for people who are seriously ill when their lives are dying.
US Code, Title 26, Subtitle F, Chapter 79, § 7702 -Definition of life insurance contract: In simple terms, this section answers the question of "what is a life insurance contract".
US Code, Title 26, Subtitle A, Chapter 1, Subchapter L, Part I, Subpart B, § 803-Income from life insurance: This section points out that life insurance dividends are not taxable, which is particularly important for life insurance policies that guarantee lifetime and have cash value.

These regulations do not require policyholders to understand in detail one by one, professionalLife insurance brokerIt will understand the details for us and tell us which insurances are taxable and which ones are not taxable.

Need to pay attention to several situations that may be taxed

Life insurance compensation is usually not taxable, but the following three tax situations require the attention of policyholders and beneficiaries:

Inheritance tax: Federal estate tax applies to relatively high-value properties. In 2018, the current inheritance tax threshold is XNUMX million U.S. dollars. Any amount exceeding the threshold is subject to tax.In addition, each state government can set their own inheritance tax and inheritance tax.Note that inheritance tax is only for inheritance, and inheritance tax is for the transfer of assets.

Gift tax: A federal tax on "gift" assets.The purpose of establishing this tax is to prevent people from transferring their inheritance in the so-called "gift" way to avoid tax.This usually happens when the policy holder is still alive and the ownership of the policy is transferred to the beneficiary.The lifetime allowance for gift tax is the same as inheritance tax.

Intergenerational asset transfer tax: As the name suggests, this tax applies to inheritance transfers between generations (for example, grandparents transfer inheritance to grandchildren).The tax exemption is the same as the inheritance tax.

The above three types of taxes are only applicable to a few cases, because most people will not exceed the inheritance limit.

Taxation of death compensation

In general,Life insurance is tax-free.The compensation funds have been paid to the beneficiary in a tax-free manner.However, when the following situations are involved, tax issues may accompany: incremental payment of life insurance income, the amount of inheritance, cash value insurance policies, policy resale and group life insurance.

Instalment or lump-sum payment

The amount of life insurance claims is usually paid out at once, but the beneficiary can choose to receive the benefits in installments.This is undoubtedly better for people who do not have much financial burden; and for people who have lost their source of income, the monthly instalment income will be easier to manage than a one-time cash payment of tens of millions.

If the beneficiary chooses installments, the total amount will generate a certain amount of interest.The compensation itself will not be taxed. It is the interest income that will be taxed.

The total amount of inheritance exceeds the tax exemption limit

If your death compensation makes the total amount of your estate exceed the prescribed tax allowance, then there is a possibility of being taxed.You can use the Irrevocable Life Insurance Trust (ILIT) to subtract your life insurance compensation from the total liquidation of your estate to avoid this situation.This is equivalent to giving your insurance policy as a "gift" to ILIT, and ILIT pays your beneficiaries.But it should be noted that if your insurance policy is not included in ILIT three years before your death, the compensation will still be calculated as an inheritance.

Another key word about Irrevocable Life Insurance Trust (ILIT) isCrummey Powers, This is a more specialized tax-free operation.This greatly exceeds the scope of ordinary people's needs, but if necessary, a professional legal team can also help you achieve it.

Cash value policy

Term life insuranceThe product structure is simple, has no cash value, and is not suitable for the following discussion.andLifetime policyMost of them are complicated in composition and have cash value. Such insurance policies will generate dividend income.The US tax law clearly states that dividends are not taxed.

Normally, the Withdrawal from the policy here is less than the amount of the premium paid and will not be taxed.However, if the withdrawal amount is greater than the amount of premiums paid, tax may be incurred.

Policyholders can askPolicy lending(Loan), but if the policy is terminated and there is an outstanding loan in it, the payment will be taxed.

People who hold whole life insurance can also give up the policy with cash value and get back a sum of cash.If the money contains past income, the income part will be taxed.

Group life insurance

Some employers purchase group life insurance for their employees as work benefits.However, due to the limited coverage and coverage, it cannot be used as a substitute for personal life insurance.The amount of this part of the insurance will also be considered in taxation. For example, if your employer purchases life insurance for you, any part exceeding US$50,000 will be taxed as income, and only the part under US$50,000 will be tax-exempt.

Policy for sale

Policyholders can sell life insurance policies, which is the same as waiving the insurance to get money. The income generated in this process will be taxed as income.

Are life insurance premiums tax deductible?

No.The tax on life insurance premiums cannot be reduced or exempted.The insured cannot use a Health Deposit Account (HSA) to pay for life insurance premiums.

Please remember again, do not assume that "as long as it is a life insurance product, the income does not need to be taxed" when buying an insurance policy.Life insurance products, especially life-long life insurance policies with cash value, have developed into very flexible financial instruments that correspond to various living conditions and tax situations one by one.Please consult with professional brokers and make reasonable plans to ensure that your interests are maximized.