Life insurance interest that can be withdrawn is considered taxable income and must be reported on your tax return. However, life policy proceeds that you receive after the death of a love one cannot be touched by the IRS. Any interest that is paid and installment payments are considered taxable income.
Interest received from a insurance claim is treated as any other paid interest. The IRS will tax this interest as they would interest from a bank account. In some cases a lump sum is due at the time of death to the beneficiary, that lump sum is tax free. We have many more Life Insurance Help Articles Now Available.
If there is any interest added to the lump sum than only the interest is taxable. For instance, if you receive 70,000 in insurance pay out and addition 500 interest, giving you a total of 70,500, the 500 is taxable. If you were to receive only the 70,000 and nothing more than you do not have to report it on your income tax.
Installment payments must be reported to the IRS. Installment payments are life insurance benefits as well as interest combined into one. The interest that is added on will be taxed and any benefit dividends will be excused. Financial institutions inform the IRS of any interest paid out. So chances of you slipping through the cracks are unlikely.
If the awarded interest is ten dollars or more you are required to complete a 1099-INT. Failure to report your interest will result in a penalty owed to the IRS. We have many more Life Insurance Help Articles Now Available.