Tax question (edit)

[Incitatus]

What does it mean for a life insurance policy to be federally taxed on the value over 50k?

This is the phrase in question:

"Federal tax law requires you to pay on the "value" of life insurance over $50,000 which is provided by your employer. The "value" of this extra amount will be added to your paycheck and W-2 statement at the end of the year as "imputed income" for tax purposes".

[DrDan]

1. I carry a couple of policies

1 for $15K to cover funeral expenses.

1 for some security for my wife. It is over the $50K.

I am guessing the first will not be subject to income tax for my wife. The second - everything over $50K would have to be claimed and taxes paid.

[econoclast]

2. Tax on life insurance

Under ordinary circumstances life insurance death benefits are tax free. That's because the premiums are paid with after-tax dollars. So if the death benefit is 50,000 dollars you don't pay tax on that amount. Suppose, however, you opt to take the benefit in say five installments. Each distribution might be more than 10,000 dollars because the undistributed benefit earns interest. So each distribution might be 10,500 dollars. The 10,000 dollar portion representing. 1/5th of the death benefit is nontaxable. But the 500 dollar portion representing "gain" over and above the 1/5th of the death benefit would be taxable.

So in your case, if the 50,000 dollars is the stated death benefit, any distribution received over and above that is taxable.

However, if the the money in question is something other than the death benefit ... The surrender value or sale value or something like that... Or if the premiums were somehow paid in pre-tax dollars, then all bets are off. Consult your accountant or lawyer or even the insurance company