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How are life insurance
cash values and death proceeds generally taxed? |
Under Current Tax Law:
- The cash value growth in a life insurance
policy generally enjoys deferral of taxation while the policy
remains in force.
- Policy loans, except those made from Modified
Endowment Contracts, are generally NOT treated as taxable
distributions.
- If the entire life insurance policy is surrendered
for its cash value, the difference between the gross cash
value and the taxpayer's basis in the policy, is generally
subject to income tax.
- Partial surrenders from life insurance policies
are taxable to the extent funds received exceed the taxpayer's
basis in the policy.
- Funds coming out of a life insurance policy
(other than as death proceeds) classified as a Modified
Endowment Contract (MEC), are taxed differently than those
not classified as a MEC. Under a MEC, distributions, including
policy loans, are subject to income tax to the extent the
gross cash value of the policy exceeds the taxpayer's basis
in the contract. In addition, a 10% penalty tax may apply
if the distribution was made prior to owner's age 59 1/2.
- In general, life insurance death proceeds
are not subject to income taxation. This income tax exclusion
makes life insurance a very attractive financial planning
tool.
Note: Security Mutual
Life Insurance Company of New York does not provide legal
or tax advice. The general information presented on
various tax aspects of life insurance is not intended
to be relied upon as tax advice. Individuals should
seek the advice of a qualified tax professional regarding
the taxation of life insurance as it applies to their
particular situation.
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