How Taxes Are Determined On Life Insurance

Interest received or that is credited to your account and can be withdrawn is called taxable income.  It must be reported on your tax return.  Taxable interests can be found in many forms, including:  interest you receive from bank accounts, loans you make to others, and interest from most other sources.

Interest on your life insurance dividends is taxable in the year it is credited to your account and reported on your tax return, if you can withdraw it in that tax year.  However, you can withdraw only the life insurance interest on the anniversary date of the policy or other specified date.  The life insurance interest is taxable and must be reported, therefore; on your tax return in the year in which the date has occurred.

Life insurance dividends are not taxable.  You do not report them on your tax return.

If life insurance death benefits are paid to you by means of a lump sum, or other regular intervals, include the life insurance death benefits in your gross income on your tax return only to the extent the benefits are more than the amount payable to you at the time of the insured person’s death.  In other words, if a life insurance death benefit is $50,000 and you were to receive $50,100 the taxable interest would only be the $100 that was over the original amount, and that would be the amount you would report on your tax return.

Should you be receiving life insurance proceeds in installments, you can exclude a portion of each life insurance installment from your taxable income on your tax return because it includes both life insurance death benefits and life insurance interest.  You can divide the life insurance death benefits of the policy by the number of years payment has been received.  That would be the amount you would get tax free each year.

Your social security number must be given to the payer of your interest income.  Failure to do so could result in having a tax penalty and a back-up tax withholding.

Forms 1099-INT and Form 1099-OID are used for reporting taxable income.  You might receive a similar document or substitute tax statement from each payer.  Payers of interest over $10 are required to furnish the IRS and you with this tax information.

Your year-end account statement normally includes this tax information.  If you don’t receive a tax statement or Form 1099, you are still responsible for reporting all taxable interest income on your tax return.