Life insurance

Life insurance is a type of insurance. As in all insurance, the insured transfers a risk to the insurer, receiving a policy and paying a premium in exchange. The risk assumed by the insurer is the risk of death of the insured.

Taxation of life insurance in the United States

Premiums paid by the policy owner are normally not deductible for federal and state income tax purposes.

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Proceeds paid by the insurer upon death of the insured are not includable in taxable income for federal and state income tax purposes but may be includable in the estate of the deceased and, therefore, subject to federal and state estate and inheritance (death) tax.

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Cash value increases within the policy are not subject to income taxes unless certain events occur. For this reason, insurance policies can be a legal and legitimate tax shelter wherein savings can increase without taxation until the owner withdraws the money from the policy.

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The tax ramifications of life insurance are complex. The policy owner would be well advised to carefully consider them. As always, Congress or the state legislatures can change the tax laws at any time.

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