Understanding the tax implications of term life insurance premiums and death benefits.

Knowledge on tax implications of selling term life insurance premiums and death benefits provides appropriate planning and compliance with the tax regulation. Term life insurance is greatly tax beneficial and for this subject a person needs to understand how these tax benefits work before making proper decisions about policy.

Premiums for term life insurance are generally paid with after-tax dollars. These premiums, then, are not tax deductible. This feature is so common among personal life insurance contracts that term life is included in it. Yet, since the premiums would not be deductible, they are paid from your income with no immediate tax advantage. But the making of the premiums non-deductible does not affect the tax-advantaged feature to be enjoyed when the insured dies.

Proceeds to a beneficiary from a death benefit in term life insurance are, for the most part, tax-free. This relates to the point where death has occurred: the person who was being insured dies, and the beneficiaries are entitled to receive benefits from the policy without federal income tax being applicable to them. This tax-free characteristic of this status relieves the family members from much burden, in the sense that they have the total amount of the death benefit without any worry about the tax liability. It is one major pro of term life insurance and ensures that the funds flowing to the family are there in full.

But there are some potential tax implications of which you might take note. If the policy forms part of an estate and the increment to the amount of the death benefit raises the total to levels above the current federal state tax exemption amounts, then it could be subject to state estate taxes. When this happens, the face value of the term policy is counted into the estate amount that would potentially be subject to estate taxes. In order to help offset this risk, people use irrevocable life insurance trusts (ILITs) to eliminate the policy from the estate, thus potentially keeping estate taxes off of the death benefit.

Cash value policies versus term life insurance have reacted differently on the question of taxes. Although term life insurance has no cash value, many may consider it valid to state the positive benefits of any tax-deferred status for the earned cash. The withdrawal or loan against the money is also possibly taxable—more so if the insurance policy is surrendered or any loan not paid back.

To put it briefly, the premiums on term life insurance are not tax deductible, but in contrast, the death benefit that has been built up is usually tax free to the beneficiaries. It is a nice benefit that guarantees to be assessed without income tax on the amount. Yet, the possibility of estate taxes in larger estates and the difference that the treatment of tax holds between the two covers are worthy of note considerations. A knowing of such tax implications gives you the ability to make a considered decision of your term life insurance, including the role it could play in your overall financial planning.