Wednesday, August 29, 2012

Section 101 Life Insurance Exclusion

How does the IRS treat life insurance payments?

§ 101(a) provides that gross income does not include “amounts receive under a life insurance contract, if such amounts are paid by reason of the death of the insured” Congressional Policy Favors this.  An individual who purchases a term life policy and lives out the term of the policy is not allowed to deduct the cost of the policy as a loss. On the other hand, no tax is levied on the profit from the policy.  The proceeds of a Whole life policy qualify for the same tax benefits as term life insurance. Maybe this exclusion is offset by the fact that premiums are not deductible.

Term Life Insurance v Whole Life - Term life insurance premiums are not deductible and death benefits are not taxed. Same with Whole life insurance.

Pre-death benefits. § 101(g) - Terminally ill can get tax free benefit, otherwise it is taxed. No transferring life insurance into annuities than getting a payout

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