What are the taxes on life insurance cash values, dividends and death benefits?
The “interest build-up” portion of the annual increase in the policy’s cash value is not taxed currently to the policy owner. Dividends generally are considered to be a “return of premium” and are also not taxable to the policy owner. Although in the typical case, life insurance death proceeds will not be subject to income taxation, these proceeds may be subject to federal estate taxation. If the insured has any elements of ownership in the policy at the time of his/her death, the proceeds are includable in the insured’s gross estate for federal estate tax purposes. State inheritance taxes and federal gift taxes may also apply to life insurance policies/proceeds under specific circumstances. You should contact your tax advisor regarding questions concerning the possible income, estate and gift tax consequences surrounding any life insurance that you currently own or are contemplating purchasing.
