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Navigating Tax on Life Insurance Payouts

Navigating Tax on Life Insurance Payouts

Life insurance payouts are usually tax-free, but certain circumstances can lead to tax liability. Withdrawals or loans against the cash value of whole or universal life insurance policies may be taxed if they exceed the premiums paid. Surrendering a policy for its cash value can also incur taxes, but companies like Pacific Life offer riders to enhance this value. Employer-paid life insurance benefits beyond $50,000 are taxed, and installments with interest are taxable as well. If an estate is the beneficiary, it may face estate taxes. The article suggests using life insurance proceeds to pay off debt, create an emergency fund, or save for retirement, with options like high-yield savings accounts and IRAs recommended for the latter. It emphasizes the importance of understanding potential tax implications and making informed financial decisions.

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