Life Insurance Payouts: Tax Implications For Nh Residents

Life insurance is often seen as a reliable way to provide for loved ones after you're gone. One of its biggest advantages is the tax relief it offers. Typically, the death benefit your beneficiaries receive isn't taxed as income, meaning they get the full amount to use for expenses like paying off debts, covering funeral costs or securing their future. However, there are some circumstances where life insurance is taxed, and it's important to know when that might happen.

Death benefits are typically not taxed

If the policyholder chose their estate as a life insurance beneficiary, taxes might also apply. The taxes that loved ones may pay depend on the estate's value.

Interest on life insurance proceeds is usually taxed

Life insurance benefits are typically not taxed, but there are some circumstances in which a payout can expose you to tax liability. For example, if you receive the payout in instalments, any interest that accumulates on those instalment payments will be taxed as regular income. If the withdrawal or loan is more than the total amount of premiums you've paid, the excess can be taxed.

Whole and universal life insurance policies can be taxed if you withdraw more than the total amount of premiums paid

Typically, the death benefit your beneficiaries receive isn’t taxed as income, meaning they get the full amount to use for expenses like paying off debts, covering funeral costs or securing their future. However, there are some exceptions. Whole and universal life insurance policies can be taxed if you withdraw more than the total amount of premiums paid. Both whole life insurance and universal life insurance policies earn interest, referred to as cash value, and policyholders may be able to make withdrawals or take out a loan against the balance. If the withdrawal or loan is more than the total amount of premiums you've paid, the excess can be taxed.

In addition, if you receive the payout in instalments, any interest that accumulates on those payments will be taxed as regular income. If the payout is spread over time, your beneficiaries should be prepared to report the interest on their taxes.

Life insurance payouts can be taxed if received in instalments

Life insurance payouts are typically tax-free, but there are some exceptions. If you receive the payout in instalments, you may be exposed to tax liability. This is because interest can accumulate on instalment payments, and this interest is taxed as regular income. Therefore, if the withdrawal or loan is more than the total amount of premiums you've paid, the excess can be taxed.

If a policyholder chooses their estate as a life insurance beneficiary, taxes may apply

Life insurance is often seen as a reliable way to provide for loved ones after you're gone, and one of its biggest advantages is the tax relief it offers. The death benefit your beneficiaries receive isn't usually taxed as income, meaning they get the full amount to use for expenses like paying off debts, covering funeral costs or securing their future.

However, there are a few situations where life insurance is taxed, and it's important to know when that might happen. A lump sum payout is the default death benefit payment method. However, your loved ones could opt to receive the life insurance payout in installments instead. While life insurance benefits are typically not taxed, there are some circumstances when a payout can expose you to tax liability, including receiving it in installments.

Both whole life insurance and universal life insurance policies earn interest, referred to as cash value, and policyholders may be able to make withdrawals or take out a loan against the balance. If the withdrawal or loan is more than the total amount of premiums you've paid, the excess can be taxed.

Frequently asked questions