Question

Indicate the death benefit the beneficiary receives after income taxes on a whole life policy with the following values. Policy loan: $1000000, Policy Dividend: $500000, Cash Value: $2000000, Policy Face Value: $5000000, Premiums Paid: $1250000, Marginal Income Tax Bracket of Beneficiary 30%

Answer 1

Generally speaking, when the beneficiary of a life insurance policy receives the death benefit, this money is not counted as taxable income, and the beneficiary does not have to pay taxes on it.

Whole life insurance is a type of permanent life insurance which is one of the two categories of life insurance.

The death benefit of a whole life insurance policy is typically a set amount of the policy contract. Some policies are eligible for dividend payments.

The death benefit received under whole life insurance is tax-free.

Cash value - In the event of the death of the policyholder, the cash value will be absorbed by the life insurance company and the beneficiary will be paid the policy's death benefit.

Policy dividend - The dividend is a portion of the insurance company's profits that are paid to the policyholders as if you were an investor or stockholder. Dividends paid by the insurance company is not taxable.

The death benefit received by the policyholder will be -

Policy face value - $5000000

less: Loan value 1000000

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$4000000

add: Dividend 500000

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The death benefit $4500000

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