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Tax and life
insurance
Life insurance insures a person's life and
secures his family in monetary terms after his death. As
long as the insurance policy is paying for events like
death life insurance can evade tax. But life insurance
policies which are used otherwise cannot be avoided from
the income tax laws of the state. This is just the basic
idea.
Whether a life insurance policy will be
free of income tax or not is completely dependant on the
type of insurance policy, the term of the policy and the
purpose of the policy. If the policy is for the coverage
of the whole life of a person to be paid only after
death, it is free of income tax even if the cash value
of this type of policy is very high. This law remains
the same for every insurance company inside and outside
United States of America.
Life insurance policies can be broadly of
two types:-
Permanent life insurance
policy
Temporary life insurance
policy
The income tax laws of the government are
different for the two types of life insurance.
-
Firstly, in case of temporary life insurance the chance
that the insured person would die is very less because
these policies are basically short term ones. If the
insured does not die within the stipulated period of
time mentioned in the policy papers then the insurance
company gets to keep the premiums paid and no payment is
done to the party of the insured. This is because the
insurance company has done its job by securing and
saving the life of the insured.
Since the temporary life insurance policy
is short term and generally opted for by the people for
monetary advantages, it directly falls under the laws of
income tax. The percentage of tax may or may not be
fixed depending on the state government. The state also
has the authority to change the terms and conditions of
income tax from time to time. For this reason the people
interested in buying temporary life insurance policies
should appoint a well knowledgeable attorney who will
take care of the terms of income tax laws. People should
also be very clear about the different tax laws of the
government and how they are subjected to change from
time to time before insuring his or her life.
- But in the second case i.e. for
permanent life insurance policy the terms and conditions
of the state income tax authority are absolutely
different. Since the permanent life insurance policy
does not pay off the promised amount before the maturity
period i.e. before the death of the insured, it does not
fall under the jurisdiction of income tax. This
facilitates the lives of the insured because the cash
value which is accumulated goes on increasing with time
and is paid in full to the beneficiaries, the people
liable to receive the face value of the permanent life
insurance policy after the death of the insured,
together with the insured amount. Nothing is deducted
for income tax. This is because this type of policy pays
you only after the maturity of the term. But universal
life insurance policy has the option of paying the
policy owner or the insured before the maturity. Since
these policies are more flexible the income tax laws
will also vary. The insured might be subjected to pay a
tax for taking the advantage of universal life insurance
policy because the money one takes out from the policy
before the maturity is nothing but an extra income which
can be turned into investment, savings as well as
expenditure. A clear knowledge regarding the tax laws of
the government helps a lot in these
matters.
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