Life insurance policies can have many kinds of benefits when they mature. Also, the beneficiary in case the policyholder can be paid in many ways. Some of the monetary benefits from the life insurance policy are taxable, while others are not. It all depends on the specific details of the insurance plan and how the benefits or compensation are paid out.
You need to understand the dynamics of taxable income, for you to get a better perspective of which part of life insurance benefits if taxable.
Taxable Income from Life Insurance
Insurance companies have come up with innovative life cover policies in a bid to attract more people to pick up plans with them. In today’s competitive business environment, life insurance policies come with a lot of benefits. In some instances, policyholders are paid interest from the cumulative sum of premiums they’ve been paying over a certain period.
Such benefits that are not part of the primary compensation are considered income and hence taxable. Any interests or tokens paid out should be declared and taxed.
The benefits are just ways used by insurance companies to entice people to pick up their policies. The main essence of an insurance policy is compensation. The compensation is not considered taxable income, because the risk has already been suffered. The compensation the beneficiaries receive should not be taxed.
Some life insurance policies have a payable amount when the term of the policy expires. Any sum of cumulative premiums that have been paid throughout the plan is not taxed. Any additional payment on that sum is considered interest, and it falls under the taxable income category. You will need to declare it, and it should be taxed.
In some instances, the beneficiary might opt to have the insurance company hold on to the compensation for a while after the policyholder dies for it to accumulate interest. Any such interest paid out is going to be tasked. In circumstances where the compensation is paid out as inheritance, the recipient might have to pay inheritance tax.
You need to consult closely with your insurance company as the policyholder to get a better understanding of which payments are taxable and which ones are not. If you are a beneficiary, how you choose to receive the compensation will determine whether it is taxable or not. The bottom line, any amount that is paid out as compensation when the risk is suffered is not taxed. Anything else paid on top of this compensation for any reason is income, and it will attract some tax.
It is quite natural for people to overlook the issues of tax when it comes to insurance compensations. You need to seek to understand these issues. It will save you from running into any problems with the taxman. As mentioned earlier, insurance companies are nowadays offering a lot of benefits, and you need to know what will be taxed and what will not. Your insurance company is in the best position to provide that information