Life Insurance Coverage Taxes Ohio OH

Reader’s Question:

My life insurance policy here in Ohio has a cash-value feature, would I get taxed if my policy’s cash-value increases?

Jane

Cleveland, OH

Generally, life insurance policies are considered as “tax-shelters” and there are only a few, specific conditions or instances wherein the state of Ohio (or any state actually) or the federal government can extract taxes. Every state will have it’s laws governing life insurance taxes of course.

Interest or dividends earned in a cash-value policies would not be subjected to state or federal tax. That’s why many people find life insurance policies attractive since they can accumulate large amounts of money over long periods of time tax-free. So they take this opportunity to invest on whole life policies, universal life policies, and variable life insurance policies. The only time one would be taxed will be when the policyholders decide to withdraw money from the cash-value account of their life insurance policy.

Beneficiaries would also not be taxed once they receive the proceeds of a life insurance policy. However, the state and the federal government are allowed to collect taxes if the life insurance benefits goes into the insured individual’s estate (see estate and inheritance tax laws). Also, a life insurance policy may be considered by the IRS as a “Modified Endowment Contract” if they notice that you are putting large sums of money as premiums, thereby nullifying your policies tax-deferred status. Do talk to your life insurance agent about specifics regarding taxes towards your life insurance policy.

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