Do beneficiaries pay taxes on life insurance policy?

Do beneficiaries pay taxes on life insurance policy?


Life insurance policies are the best way to manage financial constraints in case of demise of the breadwinner. Life insurance policies also have several tax benefits on the premium paid towards assured sum and on the maturity amount. Let’s check the tax benefits that the beneficiaries get in the life insurance policy.Before we start with the benefits, let’s delve into who are the beneficiaries of the Life insurance policies.

When getting a life insurance policy, the insurer needs to fill the name of the beneficiaries who would receive the assured sum after his demise. The assured sum is the minimum amount that is guaranteed to the insurer on purchasing the policy.This beneficiary is usually the dependent of the family who would need the money otherwise suffer massive financial crisis.

The money is given to the dependent to ensure that the financial expenses are taken care of seamlessly.Now, when the beneficiaries receive the death benefit, they get it in two ways- either the entire amount is received in a lump sum or monthly or periodic payouts. The insurer can choose the option of the payout at the time of the contract. The payment option that the insurer chooses decides whether tax is applicable on the maturity amount or not.

In case of lump-sum payment-

If the beneficiary receives the amount in a lump sum after the death of the insurer, then the entire maturity amount is tax-exempt under Section 10 (10D).

There is an exception to this rule, where the maturity amount is tax-free only if the premium paid does not exceed 10% of the assured sum. If the policy is purchased before 1st April 2012 then the premium paid towards the sum should not exceed 20% of the assured sum.

In case of periodic payout-

In case of periodic payout, the beneficiaries receive the matured sum in small portions, and the amount is held by the insurance company for that period. The amount accumulates interest over the period. This portion of interest is taxable; thus the beneficiary needs to pay taxes on the interest earned on the maturity amount.

Estate or inheritance tax

This case is rare, which arises when the beneficiary of the policy dies before the insurer. In such a case the amount goes to the estate of the insurer on his demise. When the amount becomes the legacy of the estate, inheritance tax is applicable to the amount. This case is very rare because, during the contract of the policy, the policyholder needs to state 2 beneficiaries. One is the primary beneficiary and other is the contingent beneficiary.

Other tax benefits of Life insurance policy

However, the life insurance policy brings tax benefit on the premium paid toward the sum every year. The premium paid towards the sum is completely tax free if the premium amount does not exceed 10% of the assured sum and 20% of the assured sum if the policy is purchased before 1st April 2012.

So, while choosing the payout option for the life insurance policy, it is necessary to evaluate the taxation rules. At times lump sum payout can lead to misuse of funds if not planned properly. At the same time periodic payout attracts taxes on the interest earned.

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