Quora Answer: Do You Pay Taxes on Life Insurance?

The following is my answer to a Quora question: “Do you pay taxes on life insurance?”

This varies depending on the nature of the policy, the ownership structure, the tax residence, and the beneficiary.  In some places, especially the US, there is a tax if the cash value is greater than the coverage of the policy.  This is specific to investment-linked plans, since people use it as a vehicle to hide, and move funds for the specific purposes of bypassing KYC.

In the US, and Singapore, the payout from a claim, such as a death benefit, is not taxable by itself, if the beneficiary is a natural person.  However, if there is a delay in the payout of the policy, regardless of the reason, the interest earned in that interim period is taxable income.  If the payout is not to a natural person, but to the estate of the deceased, that death benefit adds to the value of the estate, and that estate is subject to estate tax.  This is not a consideration in Singapore since we do not have an estate tax.

In many places, there is a different tax on the payout, depending on whether the owner is a legal person such as company or trust, or a natural person.  This means it matter who paid the premium, and who the policy is absolutely assigned to.  In some countries, paying the premiums personally affords you a tax break.  In other countries, it is more advantageous for the policy to be assigned to an entity, and the premiums paid are on the books as a benefit to the director.