Reader’s Question:

I’ve head from a friend here in New Mexico that one would not need to pay taxes if they receive life insurance proceeds, is this true?

Carroll

Las Cruces, NM

Yes, most of the time (and we have to say most of the time because there are still exceptions of course, but we will get to that later) income or death benefit proceeds from a life insurance policy would not be collected with state or federal taxes. This is why a lot of people decide to invest in long-term life insurance policies like whole life or permanent life and universal life insurance coverage. Life insurance can be used as a legitimate form of “tax-shelter”, by law income relieved by your policy there in New Mexico would not be taxed as long as the money stays within the policy.

Even when the said money or “Cash-Value” amount of your policy is converted to death benefits when the insured passes away (or when the policy matures) beneficiaries would not have to worry about being taxed.

The only time that the state or federal government can collect taxes is if the proceeds of the life insurance goes into the estate of the deceased. As mandated under the estate tax laws of your state. Most of these information generally apply only to long-term life insurance policies, not to term life since term life does not accumulate interest and you only pay for the coverage that you get. It would be best to consult an accountant or a financial professional regarding the insurance laws in your state regarding taxation or you should also be able to find this information under your insurance agreement.

Tags: life insurance advise, term life insurance, whole life insurance, life insurance tax