9 tax questions about insurance
Life insurance and disability insurance are two products that can offer protection when major life changes occur. But what happens from a tax perspective when these types of insurance are utilized? Read on for the answers to your questions.
Life Insurance and Taxes
Q: Do I have to pay taxes on life insurance proceeds?
A: Most of the time, no. Life insurance proceeds you receive as a beneficiary due to the death of the insured person (called the death benefit) are not generally subject to federal income taxes.1 But there are some exceptions:
When the death benefit is paid in installments – The interest that accrues on the payout is taxable. The original death benefit amount is not taxable, but as money sits waiting to be paid out in installments, it may accrue interest, and that interest is taxable.2
When the decedent’s estate is large enough – The estate of the person who has died, including any life insurance proceeds, could be subject to federal and/or estate taxes if the estate is more than the IRS' filing threshold. For 2024, this amount is $13,610.00 per person.3
This IRS tool can help you figure out if you have to pay taxes on a life insurance payout.
Q: Do I need a 1099 for life insurance proceeds?
A: No. The IRS generally doesn’t consider a life insurance death benefit as income, so you won’t get a 1099. 4
Q: Are life insurance premiums tax deductible?
A: Only if they are paid to someone else. (Like as part of an alimony agreement.) Otherwise, life insurance premiums are not tax deductible.5
Q: I have whole life. Is my cash value taxed?
A: The cash value of your whole life insurance policy will not be taxed while it’s growing.6 This is known as “tax deferred,” and it means that your money grows faster because it’s not being reduced by taxes each year. However, you may owe taxes if you withdraw the money.7
Later in life, when you’re no longer bringing home a regular paycheck, your income and your tax bracket could be lower. So, if you withdraw your money when you’re in a lower tax bracket, it may be taxed less than when cash values were first applied to your policy.8
No matter when you withdraw the money, the IRS only taxes you on the amount that is above what you’ve paid through premiums.9 For example, if you have $10,000 of cash value and earned $1,000 of that in interest, you could take out $9,000 income tax-free.
Q: I took out a loan against the cash value of my policy. Do I pay taxes on that?
A: If the policy is still in force, no. Loans against the cash value aren’t taxable while the policy is in force. But if you still have an outstanding loan balance and your policy ends, you may have to pay taxes on part of the loan amount. The taxable part of your loan amount is only money from interest or investment earnings. The money you put in through premium payments isn’t taxable.10
Disability Insurance and Taxes
Q: Do I have to pay taxes on disability insurance benefits?
A: Maybe. It depends on who paid the premiums:
- If your employer paid the premiums, then the income you get on disability is taxable.
- If you paid the premium with pre-tax dollars, then your disability income is also taxable.
- If you paid the premium with after-tax dollars, then your disability income payments are free from federal taxes.
In other words, the IRS either takes tax upfront (before premiums are paid), or they take tax on the back-end (from your weekly or monthly disability check). 11
Q: How do I report disability income?
A: Your disability income should be reported on your income tax return. Even if the premiums were paid for with after-tax dollars, report it on your tax return, but you should not owe federal tax on that money.12
Q: Can I have taxes withheld from my disability income?
A: Yes, if you are receiving disability benefits from an insurance company, you can have tax withheld by filing IRS Form W-4S.13
Q: All of these answers have been about federal taxes. What about state taxes?
A: You may also owe state and local taxes. The above answers only apply to federal income tax; depending on where you live, your disability income benefit may also be subject to state and local taxes. To avoid unpleasant surprises, it’s a good idea to consult a local tax professional or local government tax agency.14
Disclosures:
1. https://www.guardianlife.com/life-insurance/whole-life/how-it-works
2. https://www.bankrate.com/insurance/life-insurance/life-insurance-taxes/
3. https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes
4. https://www.bankrate.com/insurance/life-insurance/life-insurance-taxes/
5. https://www.bankrate.com/insurance/life-insurance/life-insurance-taxes/
6. Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.
7. Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
8. https://www.guardianlife.com/life-insurance/tax-benefits
9. https://www.marketwatch.com/guides/insurance-services/cash-value-life-insurance-taxable/
10. https://www.marketwatch.com/guides/insurance-services/cash-value-life-insurance-taxable/
11. https://www.guardianlife.com/disability-insurance/taxable
12. https://www.guardianlife.com/disability-insurance/taxable
13. https://www.guardianlife.com/disability-insurance/taxable
14. https://www.guardianlife.com/disability-insurance/taxable
Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material is intended for general public use. By providing this content, The Guardian Life Insurance Company of America, and their affiliates and subsidiaries are not undertaking to provide advice or recommendations for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial representative for guidance and information that is specific to your individual situation.
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