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Recognize how to account to the proceeds of any life insurance policy plus if they are taxable.

Life insurance policies offer both living plus demise benefits to persons. The living advantages are available to the policy owner while the contract is from drive also the insured is still living. The death benefits are generally only paid when the insured dies. These benefits are paid to a beneficiary, who is normally, but never always, a third party who is not the policy owner. If you receive the proceeds of a life insurance policy, it's imperative to understand how you should account for them.

Trouble: Moderately Easy

Instructions

1 Do never record the cash buildup of life insurance cash values inside the policy. Life insurance cash values are tax free within about a life insurance policy. Since of this, you do not need to count for it on your tax forms. This extends to dividends on a life insurance policy as long as they are employed to purchase additional settled upwards insurance.

2 Document any dividends above your basis or interest paid in cash. If you obtain dividend income from your life insurance policy (in money) that is surpass the complete amount of premiums you've paid into the scheme, you require to statement this as ordinary income. This is also true for interest earned on life insurance policies. This does not utilize to cash that is is still building up inside the policy and it does never apply to money you borrow from the scheme. This only applies to cash that is being withdrawn away from the policy. To illustration, if you've paid $5,000 from premiums, plus you withdraw $6,000 in dividends or interest, after that $1,000 will be considered a gain also be theme to income tax.

3 File all gains you receive from your life insurance on surrender. If you money in your life insurance scheme, any cash worth that exceeds the total volume of premium you've paid into the scheme is considered a gain. This represents a taxable revenue (subject to regular income tax).

4 Accounts with death advantage proceeds. Dying benefit proceeds are generally income tax free, though are subject matter to estate taxes. You will want to include the total death advantage amount inside the value of the estate. The only exception to this is if the life insurance is placed to a life insurance trust prior to the insured's death. In this example, the life insurance policy may possibly be excluded from the estate and estate taxes. You should also include the life insurance death advantage in the calculation of your state's inheritance tax, if some.

5 Account for money you receive from the sale of a life insurance policy. If you sell your life insurance policy to a viatical settlement business (life settlement corporation), you will pay out taxes on the amount of money you receive out of the viatical settlement company that exceeds the full amount of premiums you've settled in the policy.

References

"Practicing Financial Planning for Pros, Practitioner's 10th edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007 "Life & Strength Insurance, License Exam Guide, 6th Edition"; Dearborn Financial; 2004 website: Taxable & Non-Taxable Salary

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