Generally speaking, the proceeds of a life insurance policy are not taxable unless they are invested or earn interest or dividends. Easylifecover.ie explains.
Are life insurance proceeds taxed if they are deposited in a bank account?
If you have suffered a tragic loss, then although the benefit of a life insurance policy will not bring you any emotional solace, financially speaking, it can help to protect your family and the lifestyle you have become accustomed to.
When you have many years paying your hard earned cash into a life insurance policy, the last thing you want is to lose a proportion of the benefit in tax payments.
Life insurance proceeds are often paid in the form of a lump-sum cash payment. This is the preferable method of receiving a payout for the majority of people as it allows them to control how the insurance benefit is invested or spent. One of the main benefits of receiving a payout in this way is that income tax will not be payable on the proceeds.
Another common method of receiving the proceeds of a life insurance policy is through the use of a settlement option. This is often the preferable way of accepting the proceeds of the policy for those who feel under confident or unwilling to manage such a large lump sum. This is an option which is available to the policyholder either when they purchase the policy, or at a time when the benefit becomes available.
The tax implications
An important distinction to make before discussing the tax implications in further depth is that money received from a life insurance policy is not ‘inherited’; you are considered a beneficiary.
In the vast majority of circumstances you will not pay tax on money you receive as a beneficiary, whereas inherited money is paid to an estate; this estate is then subject to taxes before the money or assets are inherited. The beneficiary does not have to report the payout as income and neither does the insurance company.
If you decide to invest the money you receive from a life insurance payout then any earnings made from the investment will be taxed. However, this sum can be minimised with the aid of specific tax strategies.
If you require further information regarding the taxation of life insurance proceeds, please do not hesitate to contact our knowledgeable and experienced advisers at info@easylifecover.ie.