Notes

Is Life Insurance Dividends Taxable?
Do dividends for life insurance really add up to a big amount of money? This is a question you should ask yourself when looking at this type of investment. After linkedin , it is possible that you can benefit from the money that comes in each year through dividends.

In most cases, mutual life insurers share their profits from their policyholder's investment with other participating policyholders during the year. However, there are exceptions to this rule. This type of insurance typically pays dividends on its whole or term life policies. Usually this happens during the first six months of the policyholder's lifecycle.

Generally speaking, the amount of cash paid out as dividends for whole life policies, including those with variable, fixed, and universal rates, will be taxable as income. This includes the entire value of all policyholder investments. A portion of this value, however, will be exempt from taxation as a gift and be taxed at the normal rates.

Similarly, variable and fixed term insurance policies will be subject to tax on a portion of their distributions as capital gains. If the policyholder had been able to take advantage of depreciation, he would have also been able to deduct some of this amount. In addition, if the policyholder made use of "deferred"post-dividend basis options", he would have been able to defer some of his tax.

The tax rate will vary based on how much the insurance company pays out in dividends during any given year. Some may pay more than others. The amount of tax that will be applied to any given distribution is based on the particular circumstances of the policyholder and the amount of premiums paid by the policyholder over the life of the policy.

Dividends paid on universal and variable universal life policies do not have to be taxable if they were made as part of an agreement between the policyholder and the insurer. Universal life policies pay dividends on the policyholder's initial death. and also after the policyholder's annuity has begun. Variable universal life policies are generally tax free until the policyholder's death and then only pay dividends on its policy's value.

Distributions on term policies, such as whole, single, or variable, also need not be taxable if they are not used to pay regular premiums. However, the amount received from them as a result of the policyholder's death will be subject to taxation.

Dividends paid from any type of universal or term policy, including policies with both, can be tax free, as long as they are exempt from taxation on the basis of gift and not used to pay dividends on other types of insurance. A portion of your policy's value is also subject to the estate tax.

Some life insurance that pays dividends are considered a form of income by the Internal Revenue Service. Distributions from the policyholder's policy are subject to income tax, which are the federal income tax plus state taxes, and/or payroll tax. The state tax, however, is reduced by the insurance company's rebate, if the policyholder dies within certain states.

Certain insurance policies will pay a higher rate of dividends, as well as interest, as compared to other types of policies. There are two kinds of these policies:

A policy that pays interest only, for the life of the policyowner, is taxable on its face. It pays a smaller portion of dividends compared to other policies. It is also subject to state and federal tax at a higher tax rate.

If a policyholder has a policy that provides a choice of paying dividends and a policy that allows him to choose to pay dividends in full or in a specified amount, it is taxable as a choice. Payments that are less than this specified amount are taxed as ordinary income.
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