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Tax Implications Of Life Insurance Payouts

Whether you have already gotten the best life insurance quotes and have purchased life insurance, or you are looking for life insurance rate quotes, you may be wondering about the tax implications your heirs will face should you unexpectedly pass away. Here is some basic information on taxes that life insurance payouts are subjected to.

Income Tax

Your heirs should not have to pay income tax on life insurance payouts (as you may have found out when looking for life insurance rate quotes). Only under certain circumstances where the insurance was purchased through an employer will you be subject to income tax. You can find out details specific to your situation when you get life insurance rate quotes.

Estate Tax

As of this writing, the estate tax is set at $5 million dollars (for the United States in 2011). This means that unless the value of your estate (life insurance payouts plus home, cars, cash, stocks and so on) are in excess of five million dollars, you do not need to pay taxes on them. This will be the case for more than 90% of Americans. However if your assets are valued at $4.5 million and you have a life insurance policy for $1 million, you will need to pay taxes on half a million dollars. When you are getting the best life insurance quotes you can ask an agent for more details. When getting the best life insurance quotes you may want to factor in additional money which can be used to cover the taxes should your estate be worth more than five million dollars.

Taxes on Investments Made from Life Insurance Payouts

If your life insurance beneficiary uses the payout to make any investment, be it in their savings account or in stocks, they will need to pay taxes on any interest or gains that were earned. So if your son receives $50,000 and earns $8,000, he will need to pay taxes on that $8,000.

For most people there will be few to no taxes imposed on their life insurance payouts. When you are getting life insurance rate quotes, you can ask your agent for more details and find out if your state has any other tax implications.

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