In general, you do not have to pay taxes on your life insurance payout. You don’t have to report it to the IRS either. There are certain kinds of policies that generate gains and pay out after your death and for which taxes have to be paid.
The gains are collected and then yes, you do have to pay taxes on it.
One example of such a policy is an annuity.
An annuity is a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future.The income you receive from an annuity is taxed at regular income tax rates, not capital gains rates, which are usually lower.
The goal of annuity is to provide a steady stream of income, typically during retirement. Funds accrue on a tax-deferred basis, and like 401(k) contributions, can only be withdrawn without penalty after age 59, according to investopedia.com
We often help our clients with annuities as well. If an annuity is averaging five or even 7%, gains per year it becomes taxable when collected, spent or deposited. In that situation, you pay taxes on the gains.
Another example of taxable life insurance payouts is a structured universal whole life insurance policy.
They can be structured to generate gains of more than $1 million dollars.
Those are more expensive policies that have a sustantially big payout and it’s money that’s invested.
If you have insurance questions, annuity questions, even any questions at all we can do for you, I please click the links on button below and I’ll be happy to do a free consultation for you.
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