It’s important to understand different tax implications when buying life insurance, so you can make the right decision for your current situation and your future. Discuss with your agent at Schaller & Thomas Family Insurance.
Taxes on Life Insurance Premiums
Unlike other purchases you make in Peoria, AZ, you don’t have to pay sales taxes on life insurance premiums.
Employer-Provided Life Insurance
When an employer provides life insurance, the IRS will consider it income, which means that the employee may have to pay taxes. An employee will only have to pay taxes up to a certain amount of coverage.
Prepaid Life Insurance
Certain policies will allow the policyholder to pay a premium with a lump sum up front. This money will then get applied to the premiums throughout the plan. The lump sum will grow due to interest, and that interest money is considered income by the IRS. This means that money can be taxed either when the money is applied to the premium, or if the policyholder withdraws some of the money.
Cash Value Plans
Whole life insurance plans can also accumulate cash value, and a portion of those dollars can accumulate interest. Since these plans can accumulate interest some people use them as investments, along with the benefit that if they have an untimely death, their family is protected. This interest is still considered income and has tax implications, and financial advisors will advise not to go this route because the returns are usually minimal compared to other investments. However, the policyholder doesn’t have to pay income tax each year as the plan grows. The whole life insurance policy is tax-deferred and taxes don’t have to be paid until the policy is cashed out.
Life insurance premiums are not tax deductible. While many health insurance plans can be deducted from federal income tax, life insurance premiums are considered a personal expense that cannot be deducted on a tax return.
Contact Schaller & Thomas Family Insurance serving Peoria, AZ for a quote on life insurance.