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Term life insurance and the tax return: what about it?

With term life insurance, you give your family and dependents a lot more financial security after your death. This is because with this insurance you build up an insured amount during your lifetime, which is paid out to your family once you die.

People often ask what exactly is the connection between term life insurance and tax returns. Why do you need to report the term life insurance to the IRS? Is that insurance deductible or not? All questions that need answers and you will find them here.

Is term life insurance tax deductible?

One last question that needs a clear answer in connection with term life insurance and tax returns: is the insurance itself tax deductible? Many people ask this question because the tax-deductible nature of term life insurance would give them a financial advantage.

The answer to this question is: no, you cannot deduct mortality insurance premiums for tax purposes. In doing so, the insurance payment is subject to inheritance tax by the policyholder's next of kin in certain cases. This depends primarily on what is stated in the prenuptial agreement and exactly who the policyholder is on the policy.

However, the fact that mortality insurance premiums are not deductible also brings an advantage. Because the premium paid by the policyholder may not be deducted from that person's income, the death benefit is also not taxable.

Of course, as a policyholder, you personally don't gain much from this, since the benefit only becomes available after your death. However, your dependents will enjoy a large financial cushion that the IRS cannot touch. That gives you and them a lot of peace of mind in the meantime.

Is the insurance itself tax deductible?

The answer to this question is: no, you cannot deduct mortality insurance premiums for tax purposes. In doing so, the insurance payment is subject to inheritance tax by the policyholder's next of kin in certain cases. This depends primarily on what is stated in the prenuptial agreement and exactly who the policyholder is on the policy.

However, the fact that mortality insurance premiums are not deductible also brings an advantage. Because the premium paid by the policyholder may not be deducted from that person's income, the death benefit is also not taxable.

Of course, as a policyholder, you personally don't gain much from this, since the benefit only becomes available after your death. However, your dependents will enjoy a large financial cushion that the IRS cannot touch. That gives you and them a lot of peace of mind in the meantime.

Why do you need to report the term life insurance to the IRS?

The first question that deserves an answer is: why do you have to report your term life insurance to the IRS in the first place? This has to do with the fact that this insurance is in fact part of the policyholder's property (called Box-3 assets on the tax return).

What does that mean in practice? That, in principle, a so-called capital gains tax will be calculated on the value of the insurance itself. On the other hand, the value of the insurance is exempt in Box 3, with the condition that the total amount of the insured capital does not exceed 6,744 euros.

Do you pay taxes on death benefit insurance?

On the term life insurance policy, you effectively pay no income tax. In addition, the surviving dependents and recipients of the death insurance benefit do not pay taxes on that benefit.

This in turn translates to the fact that the policyholder does not pay taxes during his or her lifetime, since there is no benefit at that time. An additional consequence of this is that the person also cannot deduct premiums for tax purposes.

What happens after the death of the policyholder? In certain cases, surviving relatives pay an inheritance tax, but this is subject to specific conditions.

What about the policyholder's next of kin?

As already mentioned, your surviving relatives and/or recipients of the death insurance benefit also do not have to pay taxes on that benefit. However, this does not mean that those recipients will just get the full amount, as one must also take into account settlements based on the so-called inheritance tax.

If there is a marriage or registered partnership, however, this rarely leads to problems in practice. After all, in such cases, the tax authorities apply a tax-free amount of 616,880 euros. (Grand)children who inherit money, on the other hand, face a much lower exemption, as do couples living together unmarried without a cohabitation contract.