Asked by John Cole
Insurance Agent in Indian Trail, NC  |  Submitted March 11, 2016

Will my face value on my life insurance policy be tax free for my family upon my death? If I retire and use my accumulation early will I be taxed?

I am 59 1/2 now.

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  Answers  |  2

March 11, 2016

Hello John,

One of your questions points to the face amount (the death benefit) and the other points to the cash accumulation. These two different elements of your permanent plan don't necessarily follow the same path with regards to how they are handled.

The death benefit is not taxable unless it dumps more cash onto a beneficiary such that they are in the zone of estate taxes as a result of the increase in their estate's value. If your death benefit puts them over the line then they have some things to figure out, but you don't. So, it is not directly taxable but you can see how there may be a taxable event related to the death benefit after you have left the planet.

The accumulation if used early will not be taxable, either, but that is a bit simplistic. Here is what I mean. You have principal paid in and cash on top. If you withdraw up to what you paid in, there is not a problem. The cash accumulation is tax deferred so no taxes were applied, but they will be applied if you exceed the basis amount (the principal) when withdrawing (applied to the part never taxed, that is). That is the short version on withdrawals.

Then, there are loans, which avoid the withdrawal issue. So, you borrow the money from the carrier. The loan, to be clear, is not you accessing a portion of your cash accumulation. You would be borrowing money from the insurance company's account, and your cash is the collateral. If you pay it back, there won't be taxes to pay. There won't be surrender charges either because you are not giving up the policy, only borrowing against the cash accumulation. Will you have to pay interest on the loan? Yes, but it will be about 5 or 6 percent; see your policy for details. See how the loan approach can leave you with no taxes, continued growth in the policy, a death benefit, and funds for retirement?
At the same time, passing away before the loan is paid back can lead to some negatives, such as a lowered death benefit to account for the outstanding loan balance at the time of death.

Note: this info is general in nature and is offered without specific knowledge of your policy's features.


$commenter.renderDisplayableName() | 09.30.20 @ 15:11


March 15, 2016

In most cases the benefits from life policy are not taxable income to the beneficiary. Exceptions would be if you were writing off your premiums on the plan. As far as estate taxes go, it would depend on who owned the policy at death. If you owned the policy at your death, the face value would be included as part of your taxable estate and depending on the amount of your assets at death could/ would be subject to estate taxes, the beneficiaries would not be taxed. . This also would depend on if your spouse preceded you in death. If your spouse was still alive, estate taxes may not be an issue yet.

As far as using your cash values to help with retirement living it will depend on the type of policy you have and how you withdraw funds from it. It will also depend on if you plan to cancel your coverage or not to use the funds. Using a series of surrenders and loans can reduce the death benefit, but not trigger a taxable event if you keep the policy in force.

You've asked a great question and the answer can depend simply on what you want to do and where you're at in that moment in time.

$commenter.renderDisplayableName() | 09.30.20 @ 15:11