Are life insurance payouts taxable?

[alarimer]

My grandmother had a policy of $25,800 which was supposed to be divided among her 10 grandchildren. I assume it was to be divided evenly. I received the check today for $1900 and change. There was no withholding taken out. I was wondering if the taxes were taken out of the whole amount or if I got short-changed somehow. I would really hate to think that was true.

[MissMillie]

1. I don't think so

My son got a whopper of a check last year and when he had his taxes done (by a professional) I'm pretty sure they indicated that the income was tax exempt.

But please check w/ your tax person to be sure.

[alarimer]

2. Well I was hoping that it was because I didn't want to think the worst

of my aunt and cousins.

The only other possibility is that there were more people included in it than just the 10 of us.

[alarimer]

3. Apparently though a policy can be counted as part of the estate for tax purposes

Which may explain the difference. And it makes me feel better to know that, strangely.

But different web sites seem to have different answers.

[yellowdogintexas]

5. the payout is not. If it takes a long time to disperse and it earns

any income after it is redeemed then that interest is taxable

[Common Sense Party]

13. Did your grandmother have a large estate? Over $2 million?

If not, then probably no estate taxes are going to be due.

And it's doubtful that that would ever be deducted before a death benefit is paid out.

[alarimer]

14. I doubt it

But I don't know for sure.

Damn. I am looking for any possible explanation other than the one I fear it is.

[Crabby Appleton]

4. No, says IRS

http://www.irs.gov/publications/p525/ar02.html#d0e5086

[alarimer]

6. Shit. It's beginning to look like I got screwed then

out of nearly $700. I wonder how that happened? My grandmother's wishes or something my aunt did? I really hate that I have leapt to the worst conclusion but it sure looks suspiciouus.

[BellaB]

7. There might have been

some final expenses paid out of the estate. If she had any credit cards, etc... those are to be paid before the monies are handed out. Usually its a 90 day period when creditors can file a claim on what they are owed.

[alarimer]

8. I think probably that's it

Just no one said anything, that's all. Maybe they will. I sure hope so. I mean, there is already a lot of tension in this family, I would hate to make it worse by accusing someone of something that may or may not be true.

[Common Sense Party]

9. Nope. Life insurance bypasses probate.

That's why you name beneficiaries--so the tax-free death benefit goes DIRECTLY to your bennies.

[BellaB]

10. Thats how it supposed to work

but sometimes the executor screws up. Best thing would be to talk to whoever the executor of the estate was.

[Common Sense Party]

12. The life insurance company has to pay directly to the named

beneficiaries. Unless the estate was the beneficiary, the money shouldn't have come anywhere near the executor.

[Common Sense Party]

11. No, true life insurance death benefits are income-tax free.

However...

Are you absolutely SURE this was a life insurance policy? If it were an ANNUITY (which is a contract issued by insurance companies), taxes would be due on the gains.

How do you know you were alotted a 10% share? Just because there are 10 beneficiaries doesn't mean they're all equal.

Do you know FOR CERTAIN that the death benefit amount was $25,800? Did your grandmother borrow against her cash value? If she did, that loan would have to be paid back before the beneficiaries get their shares.

[alarimer]

15. Yes I know the amount. It was in the letter I got

It listed the amount and the amount I got. There were no deductions of any kind list.

What they hell should I do about this? I am pretty pissed. It does not seem to be fair.

[Swede]

19. Contact your insurance ombusdsman for your area.

It should be in the phone book.

[dogman]

16. Sometimes there are two payouts.

Some may be held for a year to cover any late claims. You need to contact the executor if you have questions.

[alarimer]

17. Update: there was a mistake made.

I don't really understand the details but my aunt gave us the wrong amount when she sent the papers for us to sign. An honest mistake, I think. So the check is correct. Still better than 0.

I just can't believe the thoughts going through my head over this.

[ScreamingMeemie]

23. ...and it doesn't bring them back.

I would give back all the life insurance back times 2 and take out a loan for a million dollars just to have my husband back. Money is nothing.

[Marrah_G]

24. I'm sorry you lost your husband. n/t

[Swede]

18. You should get the death benefit,unless it was one of those cash value boondoggle things.

Then loans,interest and premiums can be subtracted from it. Buy term and invest the difference as Suze Orman always says.

[Marrah_G]

21. You can also buy a new kind of term that returns your money if you survive the full term

I did a quick run through and here is an example.

35 year old healthy, non-smoking male with a good build can get 150,000 guaranteed premium policy for 42$ and change. 12 dollars of that is for the "return of premium rider" at the end of 30 years if you live you get back 15,400 dollars. It's not a bad deal if you aren't great at managing savings and investments.

People have to be very careful buying insurance. If it is dirt cheap you are probably getting accident only insurance. Also brokers will tell you that you don't really need to spend a few dollars more a month for the guaranteed rates. I suggest always getting the guarantee because I know of at least one company "Fidelity and guarantee" that did raise rates this year by a considerable amount.

[Marrah_G]

20. No they are not

This is why it is a very good way to leave your family what you have saved. You use your savings to pay for insurance through a living trust.

I work for a life insurance brokerage.

[Coyote_Bandit]

22. No they are not

THey are a classic wealth replacement vehicle often utilized in estate planning. If a client owns highly appreciated property it can be gifted to a non-profit. Client then receives a charitable tax deduction. Because client has smaller tax liability, client has cash available to purchase life insurance which can be passed to beneficiaries tax free unlike the highly appreciated property which carried a heavy tax burdem. That is basically how it works but it can be structured several different ways.

[alarimer]

25. Well I never really knew anything about this before

Never having been a beneficiary before this.

[Coyote_Bandit]

27. I understand all too well

My knowledge comes from my educatio and from my work in the trust and investment field....

[In_The_Wind]

26. Nope, it's all yours.

I'm sorry you lost your grandmother.