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Will my beneficiaries have to pay tax on benefit payments?

A lot of people across the state of Florida have probably considered at one time or another how their death would impact their loved ones financially. This is especially true when one individual is relied on for a majority of income. Most people want to make sure that their loved ones will be well taken care of financially after they passed away, which is why they often invest in life insurance policies that provide benefits to their loved ones in their absence.

Because not everyone is an expert in the law though and because the language used within a policy can be confusing at times, some people may still be left with questions concerning their loved ones' finances after an individual's death. One such question concerns taxes on an insurance policy's payments, which is something we'd like to discuss today.

Will my beneficiaries have to pay tax on benefit payments?

Depending on how your benefits are paid out, the answer to this question could be yes.  Let's take a look.

The payment option that is not subject to tax is a lump sum payment.  That's because the benefits are not considered income to the beneficiary.  The same is true with a workers' compensation contracts as well, just to name another example.

But for many other payment options, the amount received by a beneficiary may be subject to tax.  Examples of when this may occur can be found here on Investopedia.

Another way in which life insurance benefits may be subject to tax is if the deceased is still the policy owner upon their death.  A way around this is to make sure that another person is named as the policy's owner no less than three years prior to the person's death.  This way, the insurance benefits will not be subject to income tax for the beneficiary.

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