Death Benefit Proceeds of Life Insurance - Distribution and Taxation!
Death Benefit Proceeds of Life Insurance - Distribution and Taxation!
The taxable nature of death benefit proceeds from life insurance is something that most people do not have a clear understanding of. Most people believe that the death benefits received by the beneficiaries of a life insurance policy are always tax-free while others believe that the payout from a life insurance policy is taxed like any other sort of income. In truth, death benefits are generally tax-free with a few notable exceptions. In the majority of cases, the beneficiaries of a policy are not responsible for any taxes associated with the money that they receive. Like most things associated with taxes, however, there are some loopholes.
Death benefits are usually distributed by means of a lump sum payment to the beneficiary of the policy. The most common type of life insurance policy is term life and since these policies do not accrue any additional income, there is nothing to be taxed. Death benefits may also be distributed in the form of an annuity. An annuity is generally a series of monthly payments that are made to the beneficiaries until the funds in the policy have been exhausted. In some cases, the benefits are left with the insurance provider and interest from the benefits is paid out to the beneficiaries.
Any time that a death benefit is distributed without any additional income added, the amount of money will be delivered tax-free. However, in cases where the beneficiaries are actually receiving the interest from funds that are invested, the money will be taxed like any other type of taxable income. There are some benefits to this particular type of distribution, especially if the beneficiaries are young. A lump sum payment is often easy to spend very quickly. Money that is spread out over a period of time, or even the beneficiary's life, can often be put to greater use.
Benefits that are paid out in the form of an annuity or that are left with the insurance provider can provide income to the beneficiaries for an extended period of time. Regardless of how the money is distributed, any interest that is earned from the benefit will increase the gross income of the beneficiary and will be taxed accordingly. Whether or not the benefits are taxed is only one consideration to keep in mind when determining the best distribution method for a policy. A policyholder must also factor in the age of the recipients and the amount of money that is going to be disbursed.
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