Taxes for Whole Life Insurance Texas TX
Reader’s Question:
Before I sign up for any life insurance policies, I want to know what the tax guidelines with regards to life insurance are. I live in Texas.
Rachel
Houston, TX
Rachel, to understand fully the relationship of taxes and life insurance, you have to know that first of all, premiums paid by the policy holder are not subject to state and federal taxes (Yes, that’s including Texas). Proceeds paid to the insured or policy owner by the life insurance company upon death is not regarded as as gross income and therefore should not be taxable.
However, if the proceeds are included in the estate of the insured, chances are they will be subject to the dreaded federal and state estate and inheritance tax law. Keep in mind that cash value gains of the policy are not taxable unless certain circumstances take place. Knowing these facts, people purchase life insurance products as a hedge against income tax payments on gains made. They are legitimate tax-shelter havens, as savings can increase and not taxed unless the owner withdraws money from the policy.
However there are some life insurance products that are being policed by the IRS. If you are looking to avoid paying taxes for your gains, then you should avoid buying Modified Endowment Contracts. You should also avoid pulling out large amounts of money from flexible-premium policies because once you do that, they are now considered as income and not part of your whole life insurance policy anymore.
Tags: life insurance, life insurance policy
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