When you, the beneficiary, attempt to file a claim for a policyholder’s death, you hope that the amount paid out to you is the same as which the policyholder had purchased the contract for. This amount should be proper, and not tampered with in the least, and yet it sometimes seems like it is possible that the amount may not be what you thought it was.
This can be due to a host of different reasons, but primarily, the states have many laws in place that deny outside forces to be able to tamper with the payout amount. But, there are some cases where taxes can tax some of the money, and may make your heart skip a bit. As such, we have gathered a few of the resources to discuss some scenarios where taxes on the payouts of a life insurance claim do come into effect.
Interest Building Up
Interest building up on a life insurance policy payout will usually occur if there has been a delay with the payout itself. For instance, if the policyholder has died within the first two-year period of a life insurance policy, the insurance company may choose to delay the payout to investigate the death, and make sure there was no wrongdoings in the filing. While they do that, the payout amount is accruing interest, which can be quite large or small, depending on how long the investigation goes.
In these situations, the policy payout amount will still be tax-free, as are most payouts, but the interest that has been accrued on the payout will be taxable. As such, it is important that the two payments are different, and pay accordingly.
In some cases where death is inevitable, such as if the policyholder is struck with a terminal problem such as a cancer, individuals may be allowed to make an accelerated death claim. These are specific benefits that can be collected from the policy at an earlier period than is stipulated within the contract. These amounts are not taxable.
Cashing Out a Policy
When attempting to cash out a policy, it is important to note that there are several stipulations on what is taxable and what is not. As a whole, the entire sum of the cash out will not be taxed. Instead, the taxing portion will be if the received cash is higher than the original amount that was paid into the policy itself. The difference of the two, if there is any, will be the taxable portion. There are also other payables, such as premiums, rebates, and dividends that are taken into account when attempting to figure out what the taxable amount is.
If you have a denied life insurance claim, our life insurance attorneys can help get you the full amount of the policy.